Owl Rock Capital Corporation
Q2 2020 Earnings Call Transcript

Published: 5 Aug 2020

[Operator:]

Good morning and welcome to Owl Rock Capital Corporation’s Second Quarter 2020 Earnings Call. I would like to remind our listeners that remarks made during the call may contain forward-looking statements. Forward-looking statements are not guarantees of future performance or results and involve a number of risks and uncertainties that are outside 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 subscribed from time-to-time in Owl Rock Corporation filings with the Securities and Exchange Commission. The Company assumes no obligation to update any forward-looking statements. As a reminder, this call is being recorded for replay purposes. Yesterday, the Company issued its earnings press release and posted in earnings presentation for the second quarter ended June 30, 2020. This presentation should be reviewed in conjunction with the Company’s Form 10-Q filed on August 4 with the SEC. The Company will refer to the earnings presentation throughout the call today, so please have that presentation available to you. As a reminder, the earnings presentation is available on the Company’s website. I will now turn the call over to Craig Packer, Chief Executive Officer of Owl Rock Capital Corporation.

[Craig Packer:]

Thank you, operator. Good morning everyone and thank you for joining us today for our second quarter earnings call. This is Craig Packer and I’m CEO of Owl Rock Capital Corporation and a Co-Founder of Owl Rock Capital Partners. Joining me today is Alan Kirshenbaum our CFO and COO; and Dana Sclafani our Head of Investor Relations. Welcome to everyone who is joining us on the call today. We hope you and your families are safe and well. I'll start today's call by briefly discussing our financial highlights for the second quarter before providing an update on what we are seeing across our portfolio in this challenging economic environment. Then after Alan covers our financial results, I'll conclude by discussing our outlook and current market conditions. Getting into the second quarter financial highlights, net investment income per share was $0.34. We ended the quarter with net asset value per share of $14.52, which is an increase of 3% versus the prior quarter, primarily reflecting a reversal of a portion of the unrealized losses we took last quarter as we've seen credit spreads tightened meaningfully from the end of the first quarter. This NAV is in line with the estimated range that we pre-released on July 13. Looking forward for the third quarter, our Board has declared a dividend of $0.31 per share the same amount we have paid each quarter since our IPO and which is an addition to the previously declared special dividend of $0.08 per share. We have two additional remaining $0.08 per share special dividends, which have been previously declared for the third and fourth quarter of this year. Regarding our balance sheet, we remained very well capitalized with over $2 billion in liquidity today. That said, we continue to be cautious on capital deployment in this environment. And so we continue to maintain one of the leverage ending at 0.6 this quarter. In June, we received shareholder approval to decrease our asset coverage requirement to 150% which will allow us to achieve our revised leverage target of 0.9 to 1.25 debt-to-equity and operate with meaningfully more cushion to our regulatory cap. Lastly, the third and final lockup of our stock came off on July 20. At this point 100% of our pre-IPO shares are freely tradable. Although, we don't feel the current stock price reflects the true value of the portfolio we have created. We are pleased to have moved through the lockup period with limited disruption to our stock price, which we believe continues to highlight the long-term orientation of our shareholder base. Now, I'd like to provide an update on our portfolio. While the effects of the economic shutdown we just beginning to be felt at the end of the first quarter, the second quarter as such our top priority has remained protecting the value of our existing investments. I spent significant time on our first quarter call detailing our enhanced portfolio management process. And we have been very pleased with the outcome of this approach. Information flow with our borrowers remained strong and we continue to receive frequent updates from our companies. Overall, we feel very good about the quality of our portfolio and its performance despite the economic challenges. I'd like to remind everyone why we believe our portfolio is well positioned to weather these uncertain times with $9.2 billion of investments at fair value across 102 borrowers with an average investment size of less than 1% of the total portfolio. Our investments consist primarily of first lien term-loans to upper middle market businesses with an average EBITDA of $93 million. Since inception, we've aimed to assemble our portfolio in a defensive minded manner by focusing on large, stable, recession resistant businesses. We are well diversified across 27 industries with no industry representing more than 9% of the portfolio and our top 10 positions representing 24% of the total. We lend primarily the private equity backed companies which we find attractive because private equity firms can support their companies with financial and operational resources. In line with last quarter, our six largest sectors are software, insurance, professional services, healthcare providers, distribution, and food and beverage, which collectively comprise approximately half of our portfolio. We continue to believe this is a solid core group of sectors that continues to perform well even in the current economic environment, as many of these businesses provide essential or non-discretionary services. To-date, our borrowers in these segments have demonstrated resilience, and by and large continue to perform well. Looking beyond our six largest sectors, the vast majority of our borrowers continue to have reasonable performance even in this highly unusual environment. Although it's still early in the economic disruption, what we have seen so far, we believe validates how we have position our portfolio. As expected this quarter we saw an increase in discussions with our borrowers and their private equity owners about covenant levels and liquidity needs. To-date these discussions have been very constructive and in a number of cases have already led to concrete actions which improve our borrowers’ balance sheets. We have needed to negotiate amendments in a relatively modest amount number of credits in the context of the size of our portfolio. We executed eight significant amendments during the quarter in which we provided covenant modifications or liquidity runway, sometimes by allowing a borrower to pay a portion of interest in kind rather than in cash for a period of time. So sponsors put in additional equity in almost all of these situations. In most of these, we also received enhanced economics such as increased spread, fees or call protection. We amended roughly $500 million of investments this quarter, where we received additional economics, which added an average -- added on average and additional 120 basis points of spread on those investments. We’re pleased, strength and capacity of our portfolio management and workout resources, which have allowed us to work through these complex situations. Overall, we did not see any material change in our internal credit ratings metrics this quarter. The percentage of our portfolio which is a three or four on our internal rating system is 13% for the second quarter up only slightly from 12% in the first quarter. We also saw some names continue to outperform our expectations and we're upgraded to our highest rating category. 9% of the portfolio is now rated as a 1% versus 7% in the first quarter. Names in our two rated category, names which are performing in line with our expectations continue to account for over 75% of the portfolio. Further, we continue to have no names in the lowest rated five category and we continue to have no loss of original principal on any investments since inception. Another measure of our portfolio health is that less than $950 million or 10% of the portfolio is marked below $0.90 on a $1 today. Further, only one debt investment is marked below [$0.80]. Our most COVID impacted borrowers which make up a majority of our three and four rated investments operate across several different industries. However, for the most part, they have ultimate end-market exposure to either of two broad segments, discretionary consumer spending or the travel and hospitality space. The discretionary consumer spending end-market primarily includes businesses with physical locations, which were impacted by temporary store closures and stay-at-home orders. Many have seen some pickup in activity as the economy reopens although it's still early The travel and hospitality sectors face a longer road back to historical levels. The Company's most impacted here include the ones in our aerospace and defense sector, as well as businesses whose end-market is driven by travel. As at quarter end, each of our 102 portfolio companies were current on their interest. Pick interest represents less than 5% of total investment income for the year to-date period. We have one situation where we have agreed with the borrower to delay the interest payment past quarter-end, while we, the borrower and the sponsor are working on a broader amendment package. As previously disclosed at the end of the second quarter, we placed two names on non-accrual status. GeoDigm Corporation also known as National Dentex, and CIBT Global, the aggregate exposure of these names is approximately $165 million or less than 2% of the total fair value of the portfolio. We're working closely with both companies and their financial sponsors to help the companies through these difficult times as well as maximize the value of our investments. This is the first time since inception that we've had names on non-accrual. However, we have certainly always understood that there would be challenges overtime with a hopefully small number of names in our portfolio. We believe that the focus of our portfolio management and workout experts will allow us to navigate these challenges in a proactive and holistic manner. Turing briefly to our origination activity. During the second quarter new investment fundings were $308 million and net funded investment activity was $142 million which was net $166 million of sales and repayments. As we anticipated coming into this quarter, our originations were more modest as activity in the market slowed and we remain cautious given the macroeconomic environment. That said, we were pleased to add three new borrowers to our portfolio. As you'll see in our earnings presentation, the weighted average spread of the new investments to this quarter was 7.4%, roughly 100 basis points higher than our current portfolio spread. I'd like to spend a moment highlighting one of these deals, we provided a $300 million unit tranche loan to checkmarks and what was one of the few transactions to take place during the height of the pandemic. Our financial flexibility and ability to provide certainty enabled us to support the buyout of this leading software security provider by Hellman and Friedman and a $1.2 billion transaction. The acquisition will bolster checkmarks is already outstanding growth at a time when software security has never been more critical for modern enterprises building out their software solutions. I'll also highlight one of the names that was -- we paid at this quarter. Give & Go is a leading provider of frozen baked goods. We don't disclose ratings on individual names in the portfolio. But I can’t say that at one point during the course of our investment, this name was a three rated on our internal rating scale. The company was sold to a strategic buyer in early April and our loan was fully repaid. This example is evidence for our thesis that larger companies even if they encounter challenges should prove to be more durable and to benefit from increased strategic value and exit opportunities. Now I'll turn it over to Alan to discuss our financial results in more detail.

[Alan Kirshenbaum:]

Thank you, Craig. Good morning, everyone. First and foremost, as Craig noted, we hope that you and your families are all safe and healthy. We thank you for your continued partnership and support. The plan to take everyone through our financial results for the quarter and then touch on some of the important topics I covered last quarter as they continue to be very relevant in the current environment. To start-off and you can follow along on Slide 7 of our earnings presentation. We ended the first quarter with total portfolio in the second quarter with total portfolio investments of $9.2 billion, outstanding debt of $3.5 billion and total net assets of $5.6 billion. Our net asset value per share increased to $14.52 as of June 30 compared to $14.09 as of March 31, the NAV increase of approximately 3.1%. Our dividend for the first quarter was $0.31 per share plus an $0.08 cents per share special dividend. And our net investment income was $0.34 per share all of that was for our second quarter. On the next slide, Slide 8, you can see total investment income for the second quarter was $190 million down from $205 million last quarter. I'll talk about this a bit more in a moment. Net expenses for the second quarter were $61.7 million, up from $56.4 million last quarter. This increase was driven by two items related to interest expense in the second quarter. The first item was a non-cash acceleration of upfront costs related to the full pay down of SPV Asset Facility 1, which contributed $2.5 million in one-time interest expense this quarter. The second item was our average debt during the second quarter was higher than during the first quarter, hence increasing interest expense in the second quarter. All of this led to net investment income or NII for the second quarter of $129 million down from $146 million last quarter. Also, as a result of the fair value of our portfolio increasing from 93.5% to 95.1%, we had $175 million of net unrealized gains during the second quarter. Our other operating expense ratio continues to be among the lowest in the industry at 24 basis points on a trailing-12 month basis. And we have $0.11 per share in undistributed distributions as of June 30. To drill into our income interest -- investment income and interest expense results a little more. I think it's helpful if we talk about our asset liability, rate sensitivities for a moment. As you can see on Slide 13, our NIM analysis, our average portfolio spread is flat at 6.3% March 31 to June 30. But our yield has decreased from 8.4% at March 31 to 7.9% at June 30. This is driven by the continued decline in LIBOR. The weighted average LIBOR floor on our investment portfolio is 85 basis points. We saw floors generally kick-in towards the end of the second quarter. You can also see on this slide that our cost of debt continues to come down driven also by the decline in LIBOR. Our cost of debt declined from 4.2% at March 31 to 3.6% at June 30. So [indiscernible] back for a moment, although the decline in LIBOR affects both our investments in a negative way and floating rate debt in a positive way, we have over $9 billion of floating rate investments and a little over $2 billion of outstanding floating rate debt or on a committed debt basis a little over $4 billion. On either basis, you can see why a sharp decline in LIBOR has an adverse impact to earnings. And just to put into perspective, the LIBOR landscape over the past six months at December 31, three month LIBOR was 191 basis points. For the first quarter averaged three month LIBOR was 153 basis points. And for the second quarter average, the three month LIBOR was 59 basis points. And today, three months LIBOR is sitting around 25 basis points. That's a pretty drastic change in a short amount of time. Based on when LIBOR elections were made and the LIBOR decline over the past few months, we will see a little more pressure on interest income in our third quarter results before it flattens out. To wrap up our discussion on our financial results. As we look to the end of this year, we think it would be helpful to provide everyone with a reminder about our fee waiver and special dividends. As a result of the fee waiver, our advisor put in place in connection with our IPO. We declared six quarterly special dividends starting in the third quarter of last year and running through and including the fourth quarter of this year. You can all see all of our dividends mapped out on Slide 17 of our earnings presentation. Our fee waiver expires during October of this year and our advisor is not extending or renewing the fee waiver. I mentioned earlier in my remarks that our NII for the second quarter was $0.34 per share. If you were to impact this amount for the full effect of fees our 1.5% management fee and 17.5% performance fee that will be in effect starting in the fourth quarter of this year. Our NII this quarter would have been $0.24 per share. I would note this obviously does not take into account continued growth in our portfolio between now and the fourth quarter. Craig will talk more about our dividend coverage shortly. I also wanted to review some of the key topics I covered last quarter, including our financial philosophy and funding profile. We continue to be well positioned in the industry given the strength of our balance sheet. Our three structural pillars of low leverage, significant liquidity and unsecured debt have provided comfort to our stakeholders through this crisis to-date and has allowed us to keep an extreme focus on the health of our portfolio, the most important aspect of our balance sheet. We had very intentionally built a very well diversified financing landscape, diversifying the number of facilities we have the types of facilities and the number of lenders we partner with. Matching duration between the left and right sides of our balance sheet is another important aspect of our landscape. Our weighted average debt maturity is over six years and we do not have any debt maturities until June of 2023. As it relates to our financing activity, we were very active this quarter. You can see an overview of all of our financings on Slide 16 of the earnings presentation. To sum up our activity, we completed our fourth CLO financing from one of our dropdown SPV facilities. We added commitments to our senior security revolver taking total commitment here to over $1.3 billion. And last month we completed our fourth unsecured public bond issuance. We continue to have one of the lowest leverage levels in the industry at 0.60 times debt-to-equity. As of June 30, we had $2.4 billion of liquidity, pro forma for the $500 million bond issuance I just mentioned. In total now, we have issued $2 billion of unsecured debt, which brings us to a funding mix of 56% unsecured debt. Because of this, we continue to have a meaningful amount of excess collateral for our secured facilities. And we continue to have a significant cushion to our new regulatory asset coverage of 150%. As we have previously mentioned, our updated target leverage ratio is 0.9 to 1.25 times debt-to-equity. Overall, our funding profile is very sound and we continue to be in a very good position. Thank you all very much for your support and for joining us on today's call. Craig, back to you.

[Craig Packer:]

Thanks, Alan. I will close with some thoughts on our dividend coverage and our investment outlook. First, I would like to pick up on Alan's comment regarding our earnings. As we look ahead to the expiration of our fee waiver in the fourth quarter. When we prepared for the IPO of ORCC about a year ago, we set our regular dividend at a level we felt we could comfortably support from an earnings standpoint as we continue to ramp our portfolio to our target leverage while maintaining our strong focus on credit quality. While we remain pleased with the quality of our portfolio, the current economic climate is clearly having an impact on the earnings power of our portfolio and resulting ability to cover the dividend out of net investment income. The main challenges have been lower interest rates and slower investment pace. At the time of the IPO LIBOR was approximately 200 basis points higher than it is today. We had hoped to be at our target leverage by now, but originations have lagged our historical pace primarily because of our cautious approach to investing. We also continue to see a lower pace of repayments than expected. As a result sitting here today, we would expect net investment income to trail our regular dividend level upon the expiration of our fee waiver in the fourth quarter. The key factor to help us address this shortfall is ramping our portfolio to our target leverage level, which should boost our earnings power. Although getting to a fully ramped portfolio is the main driver, we also see opportunities to increase spread including higher spreads on new investments, improving spreads on existing investments, as well as gradually changing our asset mix to favor more unit tranche loans. It will take some time for us to achieve our target leverage and have a fully ramped portfolio, but we expect by the second half of 2021 we will be operating in our target leverage range and able to cover our regular dividend from a net investment income even in today's rate environment. Until then, we expect to be able to continue to pay our regular dividend of $0.31 per share as well as our previously declared special dividends. These comments are forward-looking and therefore inherently uncertain. We hope to achieve this goal sooner but want to be transparent as to what our current expectations are once the fee waiver expires. I'd like to spend the last few minutes discussing our perspective on current market conditions. Business conditions improved in May and June as stay-at-home restrictions eased. However, the environment remains uncertain. And we remain cautious about the economic recovery, which we believe will be slow and uneven. That said, given our significant liquidity and strong origination capabilities we are seeing some very interesting opportunities to provide financing to companies seeking enhanced liquidity and new capital. Overall, the deal flow and pipeline are picking up compared to the more muted activity in the first and second quarter. New private equity M&A flow has increased which should lead to greater market activity in the second half of the year. Now that we have a better sense of the effects of the economic slowdown on partner investments, we've been able to shift some attention to selectively deploying capital. We're excited about the current opportunity set which provide higher spreads, increase call protection and strong documentation. While allowing us to continue to invest in the same types of high quality durable businesses we are focused on since inception. While the current environment is challenging, we believe it highlights the strength of our team, platform, and balance sheet. Based on our unique capabilities, we believe we are well-positioned to continue to increase our market share as private equity firms turn to us for sizeable customized direct lending solutions with certainty. More broadly, we expect direct lending will continue to take share from the syndicated market as we see banks pull back from making new commitments and increasingly large deals are being done in the private market. In closing, we believe that our portfolio has proven so far to be resilient in the current economic environment. The certainty of our significant capital is extremely valuable and positions us to be a financing partner of choice in these uncertain times. Our team continues to work hard to protect our current portfolio of investments and to identify attractive opportunities to grow our asset base. While the environment has created some near-term earnings headwinds, our credit performance continues to be very strong. Ultimately, as a result we believe we will be able to deliver strong long-term returns to our investors without deviating from our strategy, we're sacrificing credit quality. Thank you for joining us today and on behalf of the entire Owl Rock team, we hope each of you and your families remain safe and well. Operator, please open the line for questions.

[Operator:]

Thank you. [Operator Instructions] Your first question comes from the line of Chris York with JMP Securities.

[Chris York:]

Hey guys, good morning and thanks for taking my questions. Craig, certainly I appreciate the forward-looking comments on earnings and the core dividend with respect to the expiration of the fee waiver. Now the manager had been very supportive of the vehicle historically. So, could you just update us on the managers appetite to temporarily wave seats to bridge the dividend shortfall until you grow the portfolio to potentially offset any book value declines.

[Craig Packer:]

Thanks, Chris. Look, we as you say we've been extraordinarily supportive. You should not expect that we're going to have additional fee waivers. We haven’t charged any fees since the inception of ORCC. And our shareholders have benefitted from that, from substantial special dividends. And so, Alan made in his comment Alan made the comment -- I'll reiterate, you should not expect additional fee waivers. We do however think that there a number of levers in our portfolio that will allow us to earn the dividend. I'm happy to go through those. But by getting primarily getting to our target leverage even in today's interest rate environment we expect to be able to cover the dividend. We also see opportunities to improve spread in the portfolio. At some point, our payments will pick up. And so, those factors we think should be sufficient to cover the dividend on an ongoing basis. And if there were to be any shortfall, we think it would be very modest and very short lived. But I want to be clear and not to be repetitive and you shouldn’t expect us to extend the fee waiver.

[Chris York:]

Very well, I apologize for missing Alan's prepared remarks about that. So, moving on you talked a little bit about the validation of your portfolio and a little bit on the business model. So, does the resilient fee and in strong enterprise value brought in tech companies during this time and validation and add use of -- it's important to buy out of tech companies the growth lending to because you to reconsider your allocation policy of 20% and potentially that higher going forward.

[Alan Kirshenbaum:]

Look, you are right. Our software business is we're extremely pleased with their performance. they have continued to grow even and during the pandemic that may not be growing as fast as they were previously but they continued to grow. They really benefit from some of the trends stay-at-home work remote work or many of our businesses are benefitting in the software space. So, it's our largest sector not by accident, we really like those deals. They have the most attractive economic features, lowest on the value, best covenant packages. We very much value the diversification of the portfolio and so I don’t have a -- I don’t want to signal a change to that approach. I think we're going to remain very focused on diversification. I think that there are still we have a capacity for additional software buyouts. We obviously did one this quarter. But I think that we're also sensitive to having overall industry diversification. So, there is some room for increased but we're not anticipating a significant rethink to our pros to diversification.

[Chris York:]

Got it. And then, a couple of housekeeping items. There was a meaningful change sequent in the excise tax. Maybe Alan, could you enlighten us on what the drivers in that change were?

[Alan Kirshenbaum:]

Sure. That's just going to be a matter of quarter-over-quarter where our taxable income was versus our GAAP income.

[Chris York:]

And just from modeling, should we expect more of a Q1 or a Q2 kind of excise tax going forward?

[Alan Kirshenbaum:]

I think going forward, probably more of a 1Q.

[Chris York:]

Okay. And then lastly, you've got a payable a sizeable payable on the balance sheet. Could you give us any update on how the pipeline looks in terms of originations as well?

[Alan Kirshenbaum:]

Sure. It's been picking up steadily over the last couple of months. I won’t be concrete with you or give you precise numbers but I would say as stay-at-home orders began sorry to lift. We saw some resumption in private equity M&A sale processes. We saw deals that got put on pause as COVID broke, in certain instances buyer and seller kind of resumed discussions back to where they were just pre-COVID. And so, we are I would say meaningfully busy or certainly than we were in the back half of the first quarter, in the first half of the second quarter. It's certainly not back to where it was in last year but we've seen a meaningful pickup and I do expect deal activity to be higher in the third quarter than first two. And my guess is it's higher again in the fourth quarter. So, the back half of this year I think you'll see a nice pickup in deal activity obviously dependent upon pandemic and all the other factors. But the activity, private equity firms have a lot of capital evaluations and they are very high, obviously the public equity markets are back to all time highs. And so, that supports significant valuation for sellers or private equity assets. And so, you're seeing resumption of deal activity which should help us in terms of deployment.

[Chris York:]

Perfect, that's great color. Thanks Craig, thanks Alan.

[Alan Kirshenbaum:]

Thanks, Chris.

[Craig Packer:]

Thanks, Chris.

[Operator:]

And your next question comes from the line of Ryan Lynch with KBW.

[Ryan Lynch:]

Hey, good morning. Thanks for taking my question. Kind of following-up on your commentary regarding pipeline and market activity. You said it was kind of picking up versus where it was kind of in mid-depths of the downturn several months ago. As we look forward, what do you think has to occur before deal volumes can return to more normalized level that we saw in 2019. You have to get some sort of vaccine do you think or do you just need to have business travel starter as unit GAAP and the hinderings that you can really have these face-to-face meeting. Just any thoughts or comments here you have on what it's going to take before deal volumes from a market standpoint structure aimed to more normalized levels that we saw in 2019.

[Alan Kirshenbaum:]

Sure. I mean it's a great question, obviously yes tough one to answer but I'll give you some thoughts. I might just simply start by breaking deal volume into two separate buckets. There is new there is M&A transactions where companies are getting sold to new buyers. And then, there are refinancing or liquidity driven transactions where company just raises capital. The refinancing and liquidity transactions can happen right now. Companies owned by private equity firms or not on my private equity firms may just need this liquidity to for because of the environment. Or they may want to refinance your balance sheet. Those are fairly easy, doesn’t require a change of control. There is an existing lender group or and there is an established balance sheet. So, those can happen right now and then there is M&A where buyers new buyers and sellers. Obviously the bar is much higher for a new M&A transaction where new equity owners coming in. I think that the private equity firms are able to buy companies now. Travel is not the constraint and will figure out a way to do that in a way that's appropriate and that is not the hindrance. I think the greater issue is simply in this given the uncertainty of the path of COVID and the economic recovery. For certain businesses that the visibility and their durability are clear enough that a buyer and seller can agree on value. But there are many businesses that even though stay-at-home offer or orders are lifted, the outlook for their businesses are still cloudy. And so, they just face an uncertain near-term future. And so, will be difficult for buyers and sellers to agree on value. The buyer is going to want to pay a lot of price, the sellers are going to want to wait for recovery. And so, I think as greater confidence for the economy more fully reopening, it's obviously vaccine would be one significant factor. You'll get resumption. So, there are certain sectors we are like for example we were active in the second quarter. Software, insurance, food and beverage, you don’t need a full-throated economic rebound for to get conviction around those sectors. The other sectors, businesses expose the consumer business is exposed to travel and entertainment where it's going to be choppy road back. And so, in those sectors you may see liquidity driven financing but you're not unlikely to see M&A. what does all that lead us? I think the second half of this year will be greater than the first half. I would assume the first half of 2021 is greater still. And at some point or when you see a real resumption of economic activity in the country, then we'll get back to where we were pre-COVID. I know that I haven’t said anything precise, there I wish I had a precise answer but I think that's a framework for how to think about it.

[Ryan Lynch:]

Now that's an extremely helpful color and just to sort of and for your opinion, there is nobody really hand those what's going to have and that's definitely helpful. Regarding sort of terms and structures on new deals going forward, I'm just curious to also get your thoughts on that. Just because clearly there are a lot of lenders out there who are a more shape than they were in our capital constrain during this downturn. So, that restricts it the amount of capital that can come into new deals. However because deal flow has slowed down so dramatically, it still feels like there could be a decent amount of capital still chasing after too fewer deals kind of the same problem that we had back in 2018, 2019. Although it's a much different environment where we had a lot of capacity to lend to companies. Do you see big changes in real terms and structures given the sort of muted deal volumes going forward?

[Alan Kirshenbaum:]

I do. And we demonstrated that this quarter. Spreads are wider and materially wider. I would say directionally depending upon the credit and depending upon it's first lien second lien and unitranche, the 150 basis points wider and spread, additional fee, additional call protection, good covenant packages, lower leverage points. I think the deals that we're doing today are meaningfully better, economically, and more attractive from a credit standpoint. And I think that reflects the first part of your question which is two things. 1) A number of the small lenders, they just they're having issues. And I think they have got challenges and just smaller lenders, a number of one those who are having challenges in their portfolio had very few. There is a number of lenders that have significant challenges. We got a lot of challenge in your portfolio, you really are not in a position to extend new capital. We are and we have and we'll continue to do so. But in addition, the pie is bigger. We are taking share from a indicated market. More bigger deals are coming into the direct lending space because banks are nervous about underwriting, sponsors are placing a greater premium uncertainty. So, I think the hardest part for us is just finding credit that we really like and that we think we're going to meet our specs and perform well. But when we find them, we are well-positioned to get them and they are we're getting better returns. And hope there's always going to be some measure of competition in any part of the financial markets. But I think our competitive set particularly for the larger check for the upper middle market private equity backed company with certainty in size, two, three, four $500 million at the clip I think we're one of a few. We don’t need to be the only one out there to provide those terms and could get deals. And by the way, we're perfectly happy to partner with one or two other direct lenders that are like mind to put us, we don’t need to a 100% of every deal. So, think the opportunity set is attractive. I think the harder judgment is the economic recovery. We've had the ability to originate a lot of deals over the last four years. I expect we'll continue to do so. It really is the question of our conviction around credit quality.

[Ryan Lynch:]

Okay, that makes sense. And then, just one last --.

[Alan Kirshenbaum:]

Here Ryan, you cut out there. I think Ryan, if you're still there, I think most I can’t hear you.

[Craig Packer:]

Finally, we'll go to next in the queue and we can pull Ryan back up.

[Operator:]

Your next question comes from the line of Robert Dodd with Raymond James.

[Robert Dodd:]

Hi, guys. Actually a follow-up to Ryan's question. So, if you could take an attempt breaking down as we go into the second half of the year, you talked by activities and the pickup hopefully may be more on the M&A side as well. I mean, on your prepayment and accelerated amortization which was obviously below this quarter not really surprisingly in this environment. What do you think it takes deal involvement wise given your spread well wider, structures are tight and so there's less incentive to refinance unless you -- yes, you're not going to save any money. There has to be another driver maybe an M&A transaction or post refinancing. What does it take from that kind of activity to pick backup once the visibility of any of that happening inside the second half of this year.

[Alan Kirshenbaum:]

Well sure, okay. I think it will pick back up. I think the drivers of it, you're right, this is not an environment where you're refinancing to try to save rate. M&A buyouts are the biggest driver of refinancing company gets sold, refinances it's balance sheet. But companies are also inquisitive, buy and build strategies are very prevalent for financial sponsors where they buy a company in the sector and they'll grow it overtime through acquisition. Often times, at some point in that growth, the company gets big enough that it makes sense for them to refinance. Obviously maturities play a role and then companies need to refinance their balance sheets, companies don’t wait until the last minute to do that. Everyone I think are recognized in a pretty profound scare with COVID. And so, I think companies that we delayed refinancings for the first half of this year and there are going to be companies that as the window opens up for them to pursue them even if the cost is higher, they're going to have to consider that. Because the world is an uncertain place and you can’t just simply do your refinancing the last minute. And so, I -- look, we were in an incredibly unique time. Hopefully we can all agree on that. Refinancing, repayments are going to pick up in the second half of this year borrowing some return to the level of the economic stress we felt in March and April. They're going to pick up. I think it will be we're assuming a modest pickup in quarter and then additional pickup from there but our debt has hard maturities. Sponsors want to return capital to their LPs if their companies are doing well and they were sitting on a game they're going to be looking for ways to monetize that, recap, sell the company what have you and so it's not likely we're going to be in an extended period where there's just no repayments in my opinion.

[Robert Dodd:]

Got it. Thank you and I get one more unrelated on the SPV the extra expenses you terminated the SPV 1, are there any more expected early terminations of any of your financing structures over the next call it the second half of this year and into next year or is the existing ones going to continue to exist to through the [indiscernible]? Are we going to get any other big one-time expenses in the interest expense line?

[Craig Packer:]

Yes. It is good question Robert. Hopefully this isn't viewed as a big item. It is about half a penny but over time, yes you can continue to see us take down these SPV facilities. We had a huge task early on which is we raised a tremendous amount of equity and we needed to raise a tremendous amount of debt in order to match that and get leverage and stay levered and so over time you should continue to expect us to do CLO financings out of these facilities and over time close the facilities as they're no longer needed. We could do a CLO financing right off our balance sheet. So over time we will expect to close a few more of these.

[Robert Dodd:]

Got it. Thank you.

[Craig Packer:]

Of course.

[Alan Kirshenbaum:]

Thank you.

[Operator:]

And your next question comes from the line of Mickey Schleien with Ladenburg.

[Mickey Schleien:]

Yes. Good morning Craig and Alan. I wanted to ask another question about the tone of the market and your remarks so far you mentioned that spreads are currently wider versus the pre-COVID levels but when we think about the amount of private debt capital that's been created over the years how concerned are you that your competitors will begin at some point to chase deal flow and drive those spreads down again while at the same time the forward LIBOR curve is basically flat which could potentially develop into a lot of pressure on portfolio yield?

[Craig Packer:]

Look at this point the floors for all the lenders who are really going to cover LIBOR really isn't a variable at this point. I think all lenders have a certain return expectation. They're trying to deliver to their shareholders just like we are and I think that that serves as a bit of a guide point for any lender when they're lending out capital. We want to generate a return for our investors. While there has been creation work, creation of private credit it's really a fraction of the creation of private equity. Private equity is -- has the growth of private equity is dwarfed the growth of private credit that's what drives demand for the product. In addition, private credit has taken market share from the syndicated market. So the pie is growing. It's certainly a big enough pie, and a growing pie to find attractive risk-adjusted returns for high quality upper middle market managers like ourselves and more than one a few high quality ones that are good. There is still very few firms that can write the size check that we can despite all the capital has been created. I think that's a significant driver of who private equity firms like to work with. In this environment, they want to move quickly. They want to move confidentially. They want to work with firms that can write a $300 million, $400 million, $500 million check themselves. They don't want to build a club of eight lenders that can each do $50 million and that serves us well. So I think we and other high quality managers want to deliver attractive returns for our investors. Obviously and I admit my bias in this extremely low interest rate environment, we think that our fund and I would say other high quality BDCs offer an extremely attractive risk-adjusted dividend yield and return versus other investment opportunities and so I think that I'm not sure that's totally realized at this point. I recognize there is concern about losses. On the margin if spreads get chipped away by 25 or 50 basis points it will still be the case that we can offer and others can offer an attractive risk adjusted return. It's obviously relative to something and the relative at this point is relative to zero. Right now it's not a concern right now we can do really the deals we want to do. We just question of our credit bar and we can get a very attractive spreads right now. In the environment you're describing where spreads are getting contracted it's likely an environment where the economic news is getting better. The portfolio is healing up. I mean these things don't move in a vacuum. I don't think there's an environment where spreads rip tighter and we're still in a really difficult economic environment. That I do not think is a high risk.

[Mickey Schleien:]

Okay. I think I'm clear on that answer and I just want to follow up with your -- you mentioned LIBOR floors. Have you started to see any pushback by your portfolio companies either in terms of new deals or in refinancing in terms of LIBOR floors? If I'm not mistaken they were sort of 80, 85 basis points on the upper middle market and probably 100 basis points in the lower middle market. Have they started to request lower floors?

[Craig Packer:]

We are not going to do deals without LIBOR floors. Borrowers will request lots of things but they can push back all they want. We're going to insist on LIBOR floor. We have 85 basis points. I think the market that's an average. There are a few deals in there that have 0% floor. So that's why the average is where it is but I would say market at this point is a 100 basis point forward. The vast majority deals are going to get done there and I think most lenders, I think almost all lenders will insist upon that at this point and the borrowers will pay it.

[Mickey Schleien:]

Okay. Lastly I'm just curious and I'm assuming everyone's still working remotely. How do you approach underwriting without the ability to go out and kick the tires in terms of your underwriting process?

[Craig Packer:]

Yes. It's a good question. It's a tough one that we're all facing in every walk of economic life in this country. Our team's done an extraordinary job of managing through this and the private equity firms face the same issue. Look many of the businesses we lend to are not asset intensive businesses. So the tires that you're suggesting to be kicked in many businesses it's as much financial statements talking to the management team, talking to the sponsors, independent collaboration. We can go see companies. We have the wherewithal to do that. The sponsors are selectively visiting companies as well. Obviously there are many companies on our portfolio today that we know intimately well and that's less of a pressure point but it does create a higher bar for certain businesses where to the extent we can't go see it. It will be a gating item that we might not be able to do financing. We have tremendous resources at our disposal not only our 60 person investment team but we work with extremely high quality accounting consulting firms around the world but certainly around the U.S. and we can bring whatever resources to bear we need to but if there's a small business that has a single plan and we can't go see it that could be a reason we turn that deal down in this environment. So it's something we've worked through. We're not going to sacrifice our diligence for anything but we think it's workable and will continue to be workable.

[Mickey Schleien:]

I understand and appreciate that explanation. Those are all my questions for this morning. I appreciate your time. Thank you.

[Craig Packer:]

Thanks Mickey.

[Alan Kirshenbaum:]

Thanks Mickey.

[Operator:]

[Operator Instructions] Your next question comes from line of Casey Alexander with Compass Point.

[Casey Alexander:]

Yes. Hi. Good morning. Most of my questions have been answered or maintenance questions but I will ask one. You mentioned software. You guys were early to the software area but it seems as though software now is on the to-do list of every venture debt fund and almost every traditional BDC that we see. Have you seen any change in the competitive dynamics of software deals because there are people that do seem to be chasing that particular vertical and then secondly are there any new verticals that have occurred to you that maybe you might not have thought them attractive before and it creates a new opportunity set within a new vertical that you hadn't approached in the past?

[Craig Packer:]

Sure. On software, look it has been a sector that we have had a lot of conviction now for several years and we've built out a substantial effort including having a separate dedicated fund at Owl Rock that does lending to software businesses. I won't repeat the comments I made earlier about the attractiveness of the space. It is probably the most active space for private equity. The deal volume and deal activity continues to grow. Without repeating everything I've said I think we're very well-positioned not only because of the size of the check we can write but our team has many years of experience underwriting businesses. Owl Rock as a platform has only been around for 4.5 years but the senior leadership of our tech and software team has been underwriting software investments for 15-20 years a piece and they've seen many of these companies multiple times. They have an intimacy around their business models. They've seen them. They've seen what works, what doesn't work and so I think that is a core investment skill set that we have that is very differentiated and not easily replaceable. It's not simply just want to do a software deal. You have to understand the credits not all the same. We're lumping them all into a category. It's obviously much more complicated than that. And so we are, we continue to find the terms, the economic terms and the deals and the demand for us to do those deals is very weighted in our favor. We've had a lot of success in that space. There is competition. It is an area that several other BDCs have been active in and there is plenty to feed each of us and if they're a new entrance I think there's room for that but it takes a lot of investment. It's not just money. You've got to have a significant team. You've got to have the relationships with private equity firms. You have to doing. You have to have an expertise in the deals and understand the difference between them. Private equity firms don't like what people with like to go to lenders that are just learning about space. They want to work with lenders that understand the space. So if there's problems they've got a lender that they can work through. So I don't see a big change in the competitive environment but we can certainly withstand some additional competitors but the price of admissions is a very large fund, writing a very large check with a very large investment team. In terms of new verticals, look nothing like leaps to mind. Particularly I think you can see our six biggest sectors. I think that in this environment there are certain sectors that it's just we're more confident to underwriting and there is certain sectors that probably are changed in our view. I'll use aerospace and defense as a sector that we liked a lot and understood very well and picked good companies in that sector but obviously nobody could have envisioned the kind of environment affecting air travel that there is today. so that's a sector that we liked before and just the world changed and we're going to have to look at differently. In terms of new opportunities it's just businesses that are going to hold up well in this environment. I think is really the underlying theme. I don't really have any precise area and candidly even if I did I probably wouldn't broadcast it to the whole world.

[Casey Alexander:]

Great. Thank you. I appreciate you taking my question.

[Craig Packer:]

Thank you.

[Alan Kirshenbaum:]

Thanks Casey

[Operator:]

And your next question comes from the line of Kenneth Lee with RBC Capital Markets.

[Kenneth Lee:]

Hi, thanks for taking my question. Just to follow on the originations at about expecting some origination volumes moving to skew towards this new borrowers and I saw that you added some three new borrowers this past quarter. Wondering if you would just share some of your thoughts about whether you could still see most of the origination volumes leading towards existing versus new borrowers in the near term? Thanks.

[Craig Packer:]

Sure. Yes, a quarter ago we really were focused on the existing portfolio for obvious reasons. We knew the companies, the environment was very uncertain. I would say our posture has shifted now. We're very open to new situations. We are I don't want to paint a picture that we're aggressive now. I think that we went, the second quarter I would say we went into a really defensive mode where we only did new transactions very few and the ones we had extreme level of conviction on. I think at this point we're more open-minded about new opportunities and you should expect us to have a more balanced approach between existing portfolio companies and new investments. So I think that assuming that the COVID and economic situation doesn't take a sharp turn for the worse, I think we have a very good handle now on needs in our portfolios, needs of our portfolio in terms of dollars and situations that are going to command a lot of attention. Many of them, most of them will not and so it gives us the confidence to deploy capital. We've also raised more capital getting the unsecured deal done. A few weeks ago, I just think we feel on more solid footing to add new names to the portfolio. Again moderate I want to give you a moderate sense we're not opening the spigot up but we're taking it on a moderate level in light of the still choppy economic environment.

[Kenneth Lee:]

Well and just one follow-up if I may. It looks very modest this past quarter. Just wondering whether it could remain at very modest levels going forward or do you expect any kind of pickup there? Thanks.

[Craig Packer:]

Yes. Look as I said in my comments we were pleased that while we had eight significant amendments, it's modest in the context of 102 portfolio companies. I don't expect sitting here right now a significant pickup from that number as the quarter wears on for obvious reasons. Sitting here right now it's relatively quiet but I would expect some pickup as the quarter wears on. I would have to imagine that the second quarter of 2020 will go down as high water mark for amendments among direct lenders given the magnitude of the economic shutdown but I so sitting here right now I don't expect a big pick up from here. Again it speaks in my opinion to the high quality companies we lent to that just didn't, we had eight challenging situations and the rest of the companies they're doing just fine and they didn't require amendments and there may be some additional ones in the third quarter. We'll see. But I expect it will remain a modest number on overall portfolio.

[Kenneth Lee:]

Great. Thank you very much.

[Jeff Martin:]

Thanks Ken.

[Operator:]

Thank you. I would now like to turn the call back over to Craig for closing remarks.

[Craig Packer:]

Great. Well, thanks everyone for dialing your time and attention. We're always available to answer questions about our company. We like having an informed investor base and hopefully we will improve over the next three months and look forward to talking to you at the end of the third quarter.

[Operator:]

Thank you. This concludes today's conference call. You may now disconnect.