OBDC earnings call transcript, November 5, 2026

Hey, Chris.

Look, I... I think that we tried to highlight in our prepared comments that we feel very good about the outlook. As you said, rates, higher spreads, higher credit quality, stable. So we, you know, I think your characterization is a good one. We expect things to continue to... improve from here. Got it. And then the commentary on OBDC, too, is very helpful, especially with some price discovery out there. I guess the question is, how can you guys kind of close that gap between the underlying valuations and the public stock price? Is it really just putting that data out there so investors can understand? Or is there anything else you guys can do from your side?

So it's a great question, and it's one we spend a lot of time thinking about. It may be beyond the investing. It's certainly right up there in terms of our focus. It's our hope by sharing detailed updates on how OBD. too, is performing that that will get at the core of what we hear concerns from investors on, which is the quality of the NAB and the quality of the marks. And I don't think that's specific to OBDC. I think that's been a general concern around private credit over the last year or so. I think our evaluation process is very good. I won't repeat how we do it. We use a third party. But we think here we have at OBDC II a fund that was a billion six less than a year ago. We've now exited or gotten repaid on a billion dollars of the billion six. And every position has come out at our marks. And we think by highlighting that to investors on this call and in individual conversations, given all those names are in OBDC, that that should give investors significantly improved confidence in the quality of the marks. Obviously, we're trying to do all. else we can to communicate the positive trends on earnings, the good fund position, etc. But I think the valuation point has been one that's been concerning to investors. And we think there's no better demonstration than sales and repayments at book value. And we did the initial asset sale, and that was $600 million. There were some that said, well, it's not enough. Now we've done another $450 million in very short order. And all of that capital has been returned to OBDC2 investors at book value. So we're going to continue to work very closely with OBDC's board and do all we can.

to close this discount. But I think that, you know, it's understandable this year, given all the scrutiny, the concern. But as we and some of the other funds continue to perform well, we hope that those discounts will narrow. Got it. Appreciate you guys taking the questions this morning and congrats again on another really good quarter. Thank you. Thank you.

Thanks for the question.

We've done a fair amount in terms of unsecured over the course of this year. With obviously some notes maturing. And so we feel like we're in a very good position to be opportunistic around certainly the near-term refinancings. We're north of 52% in unsecured, so well north of where we would need to be. And so we'll take a look at the unsecured markets and certainly look at secured. And secured is generally going to be cheaper. And we'll make the decisions then. The most important point is that we have way more financing now than we possibly need. We've got over $3.6 billion of cash and available liquidity relative to much lower number of unfunded commitments. In terms of some of the cost questions that you've highlighted, there are some notes that are coming off this year, and we've talked about that in prior scripts. And calls where we had fixed rate notes going back to the zero rate environment. So you will see a little bit of a tick up there, but we've been talking about all the other things that we've done to lower financing costs, in particular on the spread side. And secure it in order to offset that. Great. Thanks. And then as a follow up, how do you feel about where leverage stands today, especially as you continue to repurchase stock? And how are you guys balancing that with growing the portfolio? I think we're in a great spot. I think we like where. Where we are from a leverage standpoint, I think it gives us flexibility if we see an especially good origination quarter to take advantage of that. I think that we are properly using leverage to make sure we're generating returns. So I think it's ideal and gives us.

You know, if we were a little higher, a little lower, you know, I think that would be fine as well. But I think I like where we are.

Thanks. Thank you.

Thanks, Robert, for the questions, Logan. Look, we think they're set up really nicely. A couple of key stats, just to reiterate from earlier, we think at two times interest coverage today, even with that full 100 basis points, we would only drop about halfway back to the trough interest. There's coverage levels, so companies are set up really well today. I'd also point out that going back to the last rate cycle, we were coming off a period of time post-COVID where there were a lot of other inflationary pressures that were fairly acute, like labor cost inflation, commodity price inflation, and so there was a lot more going on. under the surface in those portfolio companies, and they all managed it really well. We did not see a material uptick in defaults there, and so I feel like with the strength in the portfolio today and where it sits today from a cash flow coverage standpoint, we're set up quite nicely, and as you know, the forward curve currently shows Stouffer topping out around four spots, 6%, which is significantly inside of where it topped out last cycle at around five and a quarter. Got it. Thank you. And on kind of like, I've asked about this strategic opportunities in the portfolio, and you've added, you know, several different types of cross-asset opportunities, et cetera. I mean, is there any update on those or the same kind of target range? I mean, that's obviously those more specialized areas where you have expertise, maybe more defensible than some of the pure, I don't want to say commodity.

Direct lending, but there's an element to that. But, you know, so any update on your view on that mix going forward? Yeah, I think we continue to like our eight different JV and specialty equity investments that we have across the portfolio. We continue to deploy. into them. And like the returns, the returns across the group from an ROE perspective have been in the low double digits consistently. And, you know, there's no change to that today. So we'd like to continue to grow it today. If you look at all eight together, they represent just over 13% of OBDC. And I think adding a percentage point or two would be something we'd continue to look to do in any given year. So slow, steady, and disciplined deployment to grow that book is our goal. Got it. Thank you.

I think it's an attractive environment to invest in upper middle market direct lending. Spreads are wider. I think deals generally are coming at, you know, reasonable leverage with good documentation. And as they have for years, as you sort of pointed out, you know, as the industry has had outflows out of the non-traded funds, that creates, you know, better supply demand characteristics for the public BDCs that aren't subject to those outflows. I think that creates a better environment. I think that we are, you know, the M&A environment is modest, you know, and I think a pickup in M&A, sponsor M&A would help, but there's enough activity for us to continue to deploy and take advantage of these wider spreads, and we highlighted that in the script. That could be through add-ons or refis. You know, we can do it from our existence. portfolio companies. So, I feel really good about upper-middle market lending and where we can deploy capital in all the components, economic, structural, other types of credits that we can finance. I think this is a good environment. Great. On the- dividend income side, you had a nice pop this quarter and it was attributed to a strategic equity investment. Can you highlight what that was and is that something that is recurring or is that more of a just kind of a one-time dividend that was- paid to OBDC? Sure. So the bulk of our dividend income is recurring. We did have a specific transaction for more where the company went about a share buyback transaction as part of that accelerated a little bit of income. So there was a slight bump of one to two cents in our income across the dividends.

This quarter that was transactional, but the vast majority of it is recurring in nature. So there is a transaction specific bump this quarter. We've had, as you've heard us talk about with LSI earlier this year, in any given quarter, there's the potential for a transaction that's non-recurring to bump those dividends up. From time to time, but more was the specific one this quarter that contributed a couple of pennies. Great. Thank you. Thank you. Next question is coming from Paul Johnson from KBW. Your line is now live.

We have very... I'll just maybe segment this a little bit. We don't have any data center equity investments, development investments in OBDC. Where we have participated in small size, altogether, it's just over 1% of the portfolio today. We've done a handful... of equipment finance deals, either in our specialty finance business, Wingspire, or on our balance sheet at OBDC. And so very small size. Where we have done that, we've tried to focus on equipment like power generation and GPUs with strong... contractual investment grade offtakers. And so we think about it as very strong contractual cash flows on the other side. And we try to think about it in terms of attractive LTVs with secured collateral and short duration. So the average duration of our transaction there is around two years or less. Weighted average... for our equipment finance deal. So we played it selectively. It's a very small size in the portfolio in the form of secured equipment finance only, not long duration data centers. That's not particularly relevant for this fund. It's other pockets at Blue Owl. Got it. Appreciate it. That's very helpful. And then I guess in terms of new deployment, you sound pretty optimistic about spreads and appreciate the examples of some refinancing opportunities there to widen out spreads within the book. I guess where does the emphasis fall today in terms of... Pricing versus the documentation. Are you in a position where you're essentially getting both better documentation and the pricing, or are you leaning a little bit harder on the spread, widening the pricing aspect?

Look, I don't want to sound sort of dismissive of the premise, but we don't make investments that we're not comfortable with the documentation. You know, it has been good for 10 years. That's the nature of direct lending. You know, we're very disciplined around that. Certainly any one deal at any one moment in time. You can get a temperature that's better, but it's just not something that we relax in any market environment. I would say in terms of our focus, it's not going to sound profound. You know, we're in a really good spot. Our leverage is right in our sweet spot. We're over earning. the dividend with the prospect that that will increase. And to a certain level, you know, we're matching deployment to repayments. And we feel we've got a good opportunity each and every quarter to do that based on the existing portfolio companies and new deals to the extent that there's a wider set of opportunities. You know, we will make the optimal choices. We'll pick the best deals that have the best combination. But they'll tend to be, I think, more, you know, economic than documentation driven. But we also like diversification. And so it's not binary. You know, we tend to just, you know, if there's more opportunities, we'll tend to spread it around a little bit. I would say, you know, at its core, we are most looking for just high quality credits to add to the portfolio that come with attractive economics and want to make sure that the capital structure is appropriate.

And that the documentation, you know, protects us. And I think we have seen those. We saw a good amount of them in the most recent quarter. And, you know, we continue to see them in our pipeline. I appreciate that. And then maybe just in terms of the request for pick at originate. What you've seen there, has that become less frequent? And that's all for me. Thank you.

So the request for pick at origination, it has been a little less frequent, but there's still the market has evolved. Larger cap issuers do seek to have the pick. Option as an option in the first couple of years in many of our first lien financings. I think that that option has been requested on the margin a little less given the rate cycle that we're in is a bit lower today than it was two or three years ago, but it's still an option that's embedded. What we have seen is borrowers have just elected to use that option with less frequency, and that's because it costs more. You pay a spread premium when you're using that option, and so I would say that it's a feature that some of the largest, highest quality borrowers continue to ask for, but we just don't see as much utilization under it today, and then some of our larger PIC investments have paid off in the portfolio. The decline in PIC in the portfolio is not just from slightly lower utilization of the existing options. It's from some payoffs. This quarter, we included some disclosure in our cash flow statement that year-to-date shows our PIC cash collections. We broke that line item out, and if you look at that year-to-date, it's actually greater than our PIC. accruals. So we've actually been monetizing a fair amount of our PIC this year and shows that our PIC loans are performing as we intended and paying off regularly. I just want to underscore this for those that aren't going into detail. Our PIC this quarter investment income percentage PIC is down.

down the last two quarters. It's the lowest level it's been in a year. Now we've gone to great pains in these calls to highlight that we are structuring our PIC intentionally and we don't see it by itself as an indicator of stress. But we also know some investors are skeptical about that. So I would highlight for those that are skeptical, it's gone down two quarters in a row. So if you believe that it's a sign of stress, then you should believe that stress is reduced. Now, again, that's not how we see it, but some do. And if you do, this should be welcome news. We use it opportunistically where we get compensated for it. It tends to be the most demanded when there's a robust new deal environment, which we're not in right now. So we get asked for it from time to time, and we consider it based on the circumstances of the deals.

Thank you.

Good morning.

But. You know, that's a day in, day out. You know, focus is picking the right credits. And I think that that without repeating our strategy, I think folks are familiar. You know, the world's uncertain. It's always uncertain. You know, and you can all have a view on where the economy is going to go and what the priorities are going to be. You know, we're trying to pick credits that are indoor regardless of, you know, the general economic conditions. So I think that's first and foremost. You know, again, we've highlighted higher rates will help. That's just math. If rates are lower, then, you know, we won't earn as much. I mean, it's not, there's not, I think, much you can do about it. It's the nature of investing in floating rate loans, which is the nature of what we do. We are, you know, again, having the capacity to take advantage of that is a way to prepare for that. And we have it. I think the spread environment is a good one. Of course, that could reverse. Again, there's, we can't control that market, but I feel like it's. It's pretty well balanced. Look, what we're going to be able to do at OBDC is regardless of what we're trying to do, regardless of the economic environment, regardless of those rate and spread environments, we're trying to deliver premium returns. Then we can get in the public markets and deliver very consistent dividend ROE. Performance and stable NAV growth. That's what we're trying to do, and we do that managing a very diversified portfolio, having very strong liability structures, having a very wide funnel. That's the model, and we think that model has worked well, high rates, low rates, and in between.

Continue doing that. Thank you.

Thanks for the question, Mickey.

Look, I think on the threes to fives rated, threes specifically, there was a... a slight increase this quarter, but I would just zoom out a little bit. Over the last two years, the threes to fives rated category has been between eight to 10% of the portfolio. So we're sort of squarely in the middle of that range in the low nines. If you look back three or four years in the 2022-23 timeframe... That category was 10% to 12% of the portfolio. So we add things and take things off of the watch list and downgrade them to three periodically and really as a precautionary measure when something underperforms. There wasn't any specific category or trend in the handful of businesses that we downgraded this quarter and we had... Some upgrades as well. So I really wouldn't say anything out of the ordinary. If you look at the earnings company by company this quarter, as we alluded to in the script, on the margin, more companies exceeded our expectation for the quarter than they did last quarter. And so on the margin... ...we felt it was a slightly stronger quarter. If you also scrutinize the fours to fives rated, the fours to fives rated is below 1% of the portfolio, and that's towards the low end of the range. So some of the movements in the buckets were in the higher category. Nothing cautionary about the quarter. In fact, on... the margin a little bit better than expectations, and we didn't really see any surprises or any large movements on the watch list in terms of markdowns, any companies hitting the wall. Material amendments were squarely in the middle of the range that we've had for the last two years in terms of amendment activity. So really...

Just nothing out of the ordinary in the portfolio this quarter. That's really helpful.

Thank you for that.

And my follow-up is regarding share repurchases, which continued in the quarter. Happy to see that. I've been at this a long time and I've seen share repurchase programs. announced and then never executed, but you're doing it. But at the same time, you've reiterated several times that economics on new deals are looking more interesting. So just curious, you know, with the stock still trading below NAV, but these investment opportunities improve. How are you weighing, you know, the accretion from additional repurchases against deploying capital into new investments? First of all, Mickey, welcome back. Great to have you back on the call after a couple of quarters. So just on the repurchase plans. I think you're spot on. We weigh it with the consideration of where's our current leverage? What do repayments look like? What does the origination pipeline look like? And then certainly, where is the stock trading? And as you've seen, we've purchased. A fair amount of stock back over the course of the last nine months or so. And we've continued to do that. You should expect us to continue to look at the stock as another investment opportunity alongside other attractive. Investment opportunities and you should expect us to continue to look at it and look at those things really balanced side by side. The only point that I would make on the repurchase plan is that we do want it and have valued it.

Notwithstanding the fact that we've bought back more stock in our plans than really, I think, any other BDC platform, is we do not run a 10b5.1 plan. We run a 10b18 plan, and so we're only open during certain windows, and so that does limit us to only... ...periods of time purchasing stock, but during those periods, as you've seen, we've been active, and you should expect us to continue to be looking at those opportunities. I understand, and thank you for taking my questions this morning.

Thanks, Vicky.

Thanks, guys.

Look, obviously, there are several factors that go into when there are repayments. Companies... Private equity firms generally don't wait until the last year or so. They want to get ahead of that. So with the maturity schedule, there's a forcing function. On average, our loans get repaid in three or four years. Exits or significant acquisitions will drive repayments. And rates will certainly... ...be a factor. But I'd say it's not the driving factor. It tends to be more corporate finance decisions made at the company. We're at the risk of stating the obvious. We're a floating rate lender. And so they're paying SOFR regardless of where rates are. And so... Unless they swap it, which most don't, but some do, even if you capture a really low rate when you happen to do your financing, two years later rates are higher, you're paying a higher rate. So I don't think the rate environment itself is going to drive activity. I think M&A activity, picking up will drive activity. But bottom line is, I think we made a comment in the script, 15% of the portfolio is turned over in the first part of this year. So it gives you a sense. And I expect you'll continue to see regular repayments, refinancings, even if rates are higher. Okay, that's super helpful. And then, you know, in the prepared remarks, you guys said the portfolio companies are showing, you know, good fundamental trends. And there was even, you've observed some upside in a portion of the portfolio relative to your internal forecast. Can you characterize where that's coming from? I mean, is it on the revenue side? Is it on the expense?

side generally? Or is it more industry specific? I think it's some of our watchlist names. We saw a handful of our watchlist names stabilize a bit and a couple of them with some positive revenue trends. So you don't want to call any single name out, but it was a positive quarter in terms of stabilization and a handful of names that were on the watchlist. As I said before, no real material surprises or large markdowns or large misses that weren't otherwise already expected. So it was really maybe some green shoots in the watchlist of some revenue. Turning and some inflection points in those names. And really just stability in the rest. The other 91% of the book just really continuing to be stable. No real surprises there either. So again, as we go through portfolio reviews, we try to. Think about where we expect things to come, where companies have budgeted for the year, how they've guided us for the next quarter. And on the margin, this was a slightly better quarter in terms of performance financially for our portfolio. Great.

Thanks very much.

I mean, I think that question would be better directed to the private equity firms than us. I would say while there's been some recovery in centum around software, public software stocks, and... and loans, and we're seeing some recovery in our marks, I think there's still some uncertainty around AI impact on software. And so I don't think...I suspect we haven't seen enough of a recovery that is going to result in a significant pickup. But look, our software... Businesses are doing really well. Their operating performance remains strong. It's one of our best performing sectors on an operating basis, revenues and EBITDA growth. So we feel good about the companies we have. We feel good about the loans that we have. And, you know, I'm pleased with the direction. I'm pleased with the markets. I think evolving more balanced appreciation for software. I think it's probably a little bit longer to where that results in exits, but there'll be a few. Great. Thank you. Nice quarter, and I applaud the shared purchases.

We've reached the end of our question-and-answer session. I'd like to turn the floor back over to any further closing comments. All right.