Blue Owl Capital Q1 2025 Earnings Report

Blue Owl Capital EPS Results

• Actual EPS: $0.39
• Consensus EPS: $0.43
• Beat/Miss: Missed by -$0.04
• One Year Ago EPS: N/A

Blue Owl Capital Revenue Results

• Actual Revenue: $464.65 million
• Expected Revenue: $457.88 million
• Beat/Miss: Beat by +$6.76 million
• YoY Revenue Growth: N/A

Blue Owl Capital Announcement Details

• Quarter: Q1 2025
• Date: 5/7/2025
• Time: After Market Closes
• Conference Call Date: Thursday, May 8, 2025
• Conference Call Time: 10:00AM ET

Blue Owl Capital (NYSE:OBDC) is a business development company. It specializes in direct and fund of fund investments. The fund makes investments in senior secured, direct lending or unsecured loans, subordinated loans or mezzanine loans and also considers equity-related securities including warrants and preferred stocks also pursues preferred equity investments, first lien, unitranche, and second lien term loans and common equity investments. Within private equity, it seeks to invest in growth, acquisitions, market or product expansion, refinancings and recapitalizations. It seeks to invest in middle market and upper middle market companies based in the United States, with EBITDA between $10 million and $250 million annually and/or annual revenue of $50 million and $2.5 billion at the time of investment. It seeks to invest in investments with maturities typically between three and ten years. It seeks to make investments generally ranging in size between $20 million and $250 million.

Blue Owl Capital Q1 2025 Earnings Call Transcript

Key Takeaways

• The company delivered solid Q1 results driven by strong portfolio performance, with no material signs of stress and significant liquidity from a diversified funding base.
• Originations were lighter as policy shifts and M&A uncertainty weighed on deal activity, resulting in $1.2 billion of new commitments and 90%+ of loans in first-lien structures.
• Credit metrics remain robust, with a nonaccrual rate of 0.8% at fair value, interest coverage steady at 1.8x, and average loan-to-value just over 40%.
• Net asset value per share declined $0.12 to $15.14 amid spread widening and write-downs, while adjusted net investment income fell $0.08 to $0.39 and the board declared both base and supplemental dividends with 106% coverage.
• Liquidity and capital structure are strong, with over $3 billion in cash and facility capacity, no near-term debt maturities, and recent debt refinancings and CLO resets lowering funding costs.

Presentation

[Operator]

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

[Michael Mosticchio, Principal & Head of BDC Investor Relations at Blue Owl Capital]

Thank you, operator, and welcome to Blue Owl Capital Corporation's First Quarter twenty twenty five Earnings Conference Call. Yesterday, Blue Owl Capital Corporation issued its earnings release and posted an earnings presentation for the first quarter ended 03/31/2025. 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 blueowellcapitalcorporation.com. Joining us on the call today are Craig Packer, Chief Executive Officer Logan Nicholson, President and Jonathan Lamb, Chief Financial Officer.

[Michael Mosticchio, Principal & Head of BDC Investor Relations at Blue Owl Capital]

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.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

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 in our view positions us well to weather potential future volatility or recession. Majority of our portfolio companies are backed by private equity sponsors who are skilled operators with significant equity investments in these businesses.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

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 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.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

With that, I'll turn it over to Logan for additional color on portfolio performance.

[Logan Nicholson, MD and President - Blue Owl BDC at Blue Owl Capital]

Thanks, Greg. As just mentioned, the recent policy shifts subsequent to quarter end only added to the uncertainty about when a pickup in M and A activity will materialize. Accordingly, originations were lighter this quarter. We recorded $1,200,000,000 of new investment commitments and $800,000,000 of fundings, excluding joint venture and strategic equity activity.

[Logan Nicholson, MD and President - Blue Owl BDC at Blue Owl Capital]

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 $4,500,000,000 transaction led by Blue Owl to refinance a syndicated loan. Notably, with an average deal size of approximately $2,000,000,000 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 $120,000,000 and weighted average EBITDA increased to $215,000,000 Portfolio company revenues and EBITDA once again increased in the mid to high single digits year over year.

[Logan Nicholson, MD and President - Blue Owl BDC at Blue Owl Capital]

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.

[Logan Nicholson, MD and President - Blue Owl BDC at Blue Owl Capital]

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 0.41.9% 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 non accrual rate remains at the lower end of our broader sector averages.

[Logan Nicholson, MD and President - Blue Owl BDC at Blue Owl Capital]

Next, our internal rating system, which ranges from one to five as an indicator of portfolio health, remained steady, and the subset of names on our watch list was also stable quarter over quarter. Interest coverage remained steady at 1.8 times 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 were converted 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 shared.

[Logan Nicholson, MD and President - Blue Owl BDC at Blue Owl Capital]

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.

[Jonathan Lamm, MD and CFO & COO of Blue Owl BDC at Blue Owl Capital]

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 post merger financials more comparable to premerger results. Under the asset acquisition method, we recognized an $83,000,000 purchase discount on the assets acquired from OBD E, which resulted in a onetime unrealized gain to OBDC in the first quarter. This purchase discount will be reversed out of unrealized gains into total investment income each quarter as the legacy OBD loans mature or are realized.

[Jonathan Lamm, MD and CFO & COO of Blue Owl BDC at Blue Owl Capital]

In the first quarter, this amortization income represented approximately $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 Blue Alpha. This noncash amortization will be reflected in our results going forward, and we're happy to discuss this further with you in Q and 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.

[Jonathan Lamm, MD and CFO & COO of Blue Owl BDC at Blue Owl Capital]

Following completion of the merger with OBDE, we ended the quarter with total portfolio investments of nearly $18,000,000,000 total net assets of nearly $8,000,000,000 and total outstanding debt of approximately $10,000,000,000 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 focus investments. Turning to the income statement. We reported adjusted net investment income of zero three nine dollars per share, down $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 $05 to last quarter's NII.

[Jonathan Lamm, MD and CFO & COO of Blue Owl BDC at Blue Owl Capital]

In addition, the remaining onethree 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 $01 supplemental dividend based on our first quarter results, which will be paid on June 13 to shareholders of record as of May 30. 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.

[Jonathan Lamm, MD and CFO & COO of Blue Owl BDC at Blue Owl Capital]

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 footing as our diversified capital structure positions us to withstand 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 0.9 to 1.25x, which is partly attributable to the onetime leveraging event of the merger with OBDE.

[Jonathan Lamm, MD and CFO & COO of Blue Owl BDC at Blue Owl Capital]

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 OBDEs one hundred and forty two million dollars July twenty twenty five 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.

[Jonathan Lamm, MD and CFO & COO of Blue Owl BDC at Blue Owl Capital]

Lastly, as a reminder, we prefunded the $425,000,000 of unsecured notes that matured in March by opportunistically raising $400,000,000 through a reopening of OBDC's March twenty twenty nine unsecured 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 $3,000,000,000 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.

[Jonathan Lamm, MD and CFO & COO of Blue Owl BDC at Blue Owl Capital]

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.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

Thanks, Jonathan. The recent volatility across stocks and 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.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

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's 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.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

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.

[Operator]

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

[Brian Mckenna, Director - Equity Research at Citizens JMP]

Thanks. Good morning, everyone. 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 this lack of new M and A transactions. We finally got some volatility, banks did pull back.

[Brian Mckenna, Director - Equity Research at Citizens JMP]

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 and A. So here we are, there's been no change in the broader M and A backdrop. Do you have any updated thoughts on where we go from here? And then if activity remains or muted on the M and A side, does that have any implications on OBDC?

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

Okay. Thanks, Brian. There are a few pieces in there. So if I don't get all of them, remind me. I don't know, I haven't seen it yet.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

Think that's held up well over time. So I I I think I was probably spot on there. Look. Try to try to hit some of the themes that that you're asking about just to pull the lens back. Last year was a moderate m and a environment with a really strong, broadly syndicated loan market and rates spreads tight.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

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 and A. I think there was a lot of optimism with the new administration that would be deregulatory that would result in M and A with the 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 the spread environment.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

What's happened so far this year is given there's just been after the initial, I think, optimism around the administration, the there's been a lot of uncertainty created by tariffs in particular, and that's had a showing effect on M and A, both private equity, but just in general, the uncertainty around tariffs has created a muted M and A environment. And I think most people expect that to continue for a while. Until there's greater clarity, it's hard for companies to want to buy and sell and for there to be an active M and A environment. And so I think that will continue to be the case. On the spread front, the public loan market, you know, really closed up.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

It's opened up a little bit now, but but the extreme volatility of a month or so ago really impacted the public loan market. So that bit 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.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

That we haven't seen that yet. Private credit spreads are stable. I think different market participants might call it 25 basis points wider, maybe 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.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

Our hope is to have it go wider. We are certainly pushing for that in in 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.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

Our portfolio companies, we have a significant number of incumbencies, and they are constantly doing add on acquisitions that are smaller, but allows 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. You know, it's a fine environment for investing. I you know, I'd like to see more deal flow. I'd like to see a little bit better, you know, economic terms, but the quality is very good, and the and the portfolio companies are holding up very well.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

So hopefully, captures, I think, the gist of what you're asking about. But if I missed any piece of it, just remind me.

[Brian Mckenna, Director - Equity Research at Citizens JMP]

Yes. No. I think you got most of it, if not all of it. So that's super helpful. Appreciate that.

[Brian Mckenna, Director - Equity Research at Citizens JMP]

There were clearly a few questions in that. So I just have one quick follow-up. Is there any updated timeline around the public listing of OTF now that that merger is complete?

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

There's no there's nothing nothing for us to disclose here. As we have with we've obviously completed a number of strategic transactions, merger merger of OBDC and E, 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 funds are not meeting report on it, but the the our tech fund now combines the private tech funds would be one of the largest, most consequential BDCs if it were public companies. So if we found a window where we think that makes sense, you know, that we we would explore that as we have some of the other strategic transactions.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

So we're we actively look at each of our funds regularly to see what makes sense, but nothing more specific to report.

[Operator]

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

[Mickey Schleien, MD - Equity Research at Ladenburg Thalmann]

Good morning. Wanted to ask

[Operator]

This call will be recorded. Call is no longer being recorded.

[Mickey Schleien, MD - Equity Research at Ladenburg Thalmann]

Greg?

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

We're here, Mickey. I'm not sure what that was, but we're here.

[Mickey Schleien, MD - Equity Research at Ladenburg Thalmann]

I'm not sure. Sorry. 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 and close for share repurchases, but why not rotate some of the repayments you've received into buying shares during the recent periods of volatility, which would seem to be a great use of capital?

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

So we a share repurchase program. We've also instituted an ATM program. You know, we look at both tools regularly, you know, weekly, daily. As you know, there are there are windows for share repurchases. So and they're meaningful windows, which I won't get into precisely here, but they're measured in weeks, not in days.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

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. I mean, it was not that long ago that we've been above book value. So these things move quickly and they have to line up. We've used 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.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

The yields on our stock today on our base dividend is close to 11%. And we haven't had any credit issues in our peers that have comparable credit quality or trading at 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.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

So we always weigh that. But it's something that we will continue to look at.

[Mickey Schleien, MD - Equity Research at Ladenburg Thalmann]

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

[Jonathan Lamm, MD and CFO & COO of Blue Owl BDC at Blue Owl Capital]

It is correct.

[Mickey Schleien, MD - Equity Research at Ladenburg Thalmann]

Okay. Thank you for that. That's it.

[Operator]

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

[Casey Alexander, Senior Vice President & Research Analyst at Compass Point Research & Trading LLC]

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

[Jonathan Lamm, MD and CFO & COO of Blue Owl BDC at Blue Owl Capital]

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 dropdown 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 OBDC3 that were high coupon as well at the first possible chance to take those notes out.

[Jonathan Lamm, MD and CFO & COO of Blue Owl BDC at Blue Owl Capital]

So there's more there to do. And as the call dates sort of come up, we'll certainly be able to take advantage of that.

[Operator]

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

[Robert Dodd, Analyst at Raymond James]

Hi, guys. You've answered the spread in M and A one really clearly in case you got the liability one. So the the board one, going going back to kind of your opening remarks here. I mean, at this point in your underwriting case, when you're looking at new deals, what are you ranking, you know, 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 for a lot of your businesses, they're not that economically sensitive because of the services side.

[Robert Dodd, Analyst at Raymond James]

But how you know, is is that kind of near term view, like, you know, the second half of twenty five, has that view changed on the probability of a meaningful or moderate economic slowdown?

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

Sure. So look, I'll try to answer your question, but I'm going to just try to give a broader lens to it. We're the economy can be gangbusters, and we're running downside cases. We're you know, 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.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

So we're extremely downside focused, and it's a hallmark of our underwriting process. In addition to that, as you know, we're buying businesses, we're investing businesses, excuse me, that are not that typical. That's that is also a hallmark of our investment process. Software, insurance brokerage, health care, food and beverage, mostly US businesses, mostly stable, mostly annuity like revenue streams. That's what we like to invest in.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

I'll also repeat what we said on this in our prepared remarks. We're not seeing any economic weakness in our portfolio companies. Now we are not a forward indicator of The U. S. Economy because we're selecting into the most stable parts of The U.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

S. Economy. So we wouldn't see it, but we're not. If you're if if 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.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

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 our downside case.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

So I think that that's just sort of responsible lending in this kind of environment, and we are downsizing our orientation. So we're taking that into account, and that'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 very stable ones. So we are certainly factoring that in.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

And it's we insist that, that introduces a level of caution as we look to deploy additional capital.

[Robert Dodd, Analyst at Raymond James]

Got it. Got it. Thank you for that. Now one more, if I can. I mean on now the businesses have 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, etcetera.

[Robert Dodd, Analyst at Raymond James]

I mean, any 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 But those differentiated strategies you want within this vehicle.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

So as you're alluding to, at OBDC previously, we had fairly meaningful investments in a number of essentially portfolios of assets. We have 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. OPDE had much less.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

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, they're 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, a drug royalty business. So diversified underlying pools that are delivered depending upon the structure, low to middle low to mid teens ROE.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

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.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

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.

[Operator]

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

[Casey Alexander, Senior Vice President & Research Analyst at Compass Point Research & Trading LLC]

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?

[Jonathan Lamm, MD and CFO & COO of Blue Owl BDC at Blue Owl Capital]

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

[Casey Alexander, Senior Vice President & Research Analyst at Compass Point Research & Trading LLC]

Okay, great. Thank you.

[Operator]

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

[Sean-Paul Adams, Equity Research Analyst at B. Riley Securities]

Good morning. I think you already touched on part of this question earlier in the call. But now that the OBD merger has closed, what kind of specific operational efficiencies besides just the refis 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?

[Sean-Paul Adams, Equity Research Analyst at B. Riley Securities]

And when would we see the full benefit to OBDC?

[Logan Nicholson, MD and President - Blue Owl BDC at Blue Owl Capital]

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, I think they 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.

[Logan Nicholson, MD and President - Blue Owl BDC at Blue Owl Capital]

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 OBD E 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 liens or junior capital where OBD E was also underweight.

[Logan Nicholson, MD and President - Blue Owl BDC at Blue Owl Capital]

So some of them are more market dependent. JVs is more time dependent, and we're working on those now. And then there are cost structure sides, which I'll let Jonathan touch on.

[Jonathan Lamm, MD and CFO & COO of Blue Owl BDC at Blue Owl Capital]

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.

[Sean-Paul Adams, Equity Research Analyst at B. Riley Securities]

Got it. I appreciate the color. Thank you.

[Operator]

Thank you. Our next questions are from the line of Finian O'Shea with Wells Fargo. Please proceed with your questions.

[Finian O'shea, Analyst at Wells Fargo]

Hey, everyone. Good morning. So I might be piggybacking on Robert's question here, but I want to go back to spread as well. Appreciating the contemporary puts and takes. Longer term, you and your large market peers have these burgeoning wealth products and you're going more and more upmarket in deployment.

[Finian O'shea, Analyst at Wells Fargo]

So do you think there's more of a firmly secular trend downward on spread? And if so, will the public BDC continue to stay on that bus or pivot more meaningfully toward higher spread? I think you mentioned ABF or just other sort of old school private credit strategies. Thank you.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

Sure. Let me try to take a stab at that. Look, just for just a level set, the spread in our portfolio today is, at the end of this quarter, it was 5.9 over. I think it's an excellent spread. Even with base rates where they are, that's an absolute all in return of north of 10% for portfolio, primarily first lien assets to good companies.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

So spreads have come in. I don't think it's a secular shift. I think it's a cyclical shift. The strength in the broadly syndicated loan market, which is a market that we do compete with, drove spreads down last year in an environment with light M and A, give us a window where either there's more M and A or a closed public loan market, and I think spreads will widen. So I view it as just a typical cycle, not a secular shift.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

You're right that there's been a growth in the non traded BDCs in the wealth channel. That's a channel that we participate But at the same time, the addressable market for those deals have expanded in pace. The growth in that channel is what's allowing us to finance deals that are $3,000,000,000 4 billion 5 billion dollars at a clip. And so the market is growing as the capital is growing to support that market. And the private equity firms are choosing to use direct lending solutions to finance bigger deals in a way they never have before because they like the solution.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

And we get premiums of the public markets. So that all feels good to me. I also think that the larger deals are just really good credits. And I think that this is an area that observers just don't fully give us credit for. And we're financing deals that are 3,000,000,000 or $4 5 billion dollars These are $18,000,000,000 companies with $4,000,000,000 equity checks from private equity firms.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

The industry is just much higher quality than it was ten years ago. And I think it's one of the reasons why I expect it will continue to perform from a credit standpoint. In terms of our strategy for OBDC, our strategy is going to remain the same. We have been, from the beginning, focused on credit quality versus all else. And we continue to think that the quality of the upper middle market company is attractive, and that's where we seek to play.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

And I would also offer that I think that spreads in smaller deals are the same as the upper middle market. And I know there will be others out there that will argue otherwise, but that's not what we're seeing. We look at everything that's out there, and we think it's pretty comparable. So we think we're getting better quality for comparable spreads. I also think that a portfolio of high quality upper middle market loans that's diversified and it's yielding 11% holds up really well in this environment.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

I don't think we have to change our strategy. I think our strategy is delivering great returns for investors. And so I think that's all working. We, as you know and as many know, at Palau, we have expanded our credit platform. We have gotten into alternative credit or asset based lending that which some will use that term.

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

That's a capability that we didn't have in scale before. That may produce opportunities for us to occasionally put some of those assets into the BDC if we think that they're of proper credit quality, can deliver kind of a consistent income that we're known for. But that's really on the margin. We're not looking to change our strategy. And I think that this will continue to be attractive risk adjusted return for investors.

[Finian O'shea, Analyst at Wells Fargo]

Very good. Thanks. And just a follow-up, John, you mentioned spillover support in the evolving base rate environment. Does that mean you'll say if base rates go more firmly against us here that you'll run that down and earn below the dividend until that's through? Or will your posture be, I guess, when if and when SOFR pushes earnings below the dividend?

[Jonathan Lamm, MD and CFO & COO of Blue Owl BDC at Blue Owl Capital]

Yes. Mean, look, we view spillover income as good for helping to sustain the dividend during periods of volatility. That was what I had indicated on in my prepared remarks. We're 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 dividend. We're just not at that point now.

[Jonathan Lamm, MD and CFO & COO of Blue Owl BDC at Blue Owl Capital]

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.

[Finian O'shea, Analyst at Wells Fargo]

That's helpful. Thanks so much.

[Operator]

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

[Maxwell Fritscher, Equity Research Associate at Truist Securities]

Yes, good morning. I'm on for 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?

[Logan Nicholson, MD and President - Blue Owl BDC at Blue Owl Capital]

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 and 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.

[Logan Nicholson, MD and President - Blue Owl BDC at Blue Owl Capital]

And with 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 and A, there's been quite a few attractive deals already announced.

[Logan Nicholson, MD and President - Blue Owl BDC at Blue Owl Capital]

One deal north of $4,000,000,000 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.

[Maxwell Fritscher, Equity Research Associate at Truist Securities]

Understood. Thank you. And then you've 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?

[Logan Nicholson, MD and President - Blue Owl BDC at Blue Owl Capital]

Sure. Exactly right. So in the first quarter, we had five names that went from partial pick to fully cash pay. And so we do have visibility to others likely going off their pick options. Again, of these windows, it is at the borrower's option.

[Logan Nicholson, MD and President - Blue Owl BDC at Blue Owl Capital]

And so sometimes it's voluntary and sometimes it's time based, but we do have visibility. And we expect our pick 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 pick, and 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.

[Logan Nicholson, MD and President - Blue Owl BDC at Blue Owl Capital]

So opportunistic refinancings of junior capital into delevered capital structures into first liens or simply take outs with cash flow. And to the extent that the markets are open and active in terms of refinancings, we will continue to see that.

[Maxwell Fritscher, Equity Research Associate at Truist Securities]

Very good. Thank you.

[Operator]

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

[Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs at Blue Owl Capital]

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

[Operator]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.

Participants

Executives

• Michael Mosticchio, Principal & Head of BDC Investor Relations
• Craig Packer, Co-President & Chief Executive Officer of each of the Blue Owl BDCs
• Logan Nicholson, MD and President - Blue Owl BDC
• Jonathan Lamm, MD and CFO & COO of Blue Owl BDC

Analysts

• Brian Mckenna, Director - Equity Research at Citizens JMP
• Mickey Schleien, MD - Equity Research at Ladenburg Thalmann
• Casey Alexander, Senior Vice President & Research Analyst at Compass Point Research & Trading LLC
• Robert Dodd, Analyst at Raymond James
• Sean-Paul Adams, Equity Research Analyst at B. Riley Securities
• Finian O'shea, Analyst at Wells Fargo
• Maxwell Fritscher, Equity Research Associate at Truist Securities