Owl Rock Capital Corporation
Q4 2019 Earnings Call Transcript

Published: 20 Feb 2020

[Operator:]

Good morning and welcome to Owl Rock Capital Corporation's Fourth Quarter and Year Ended 2019 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 described from time to time in Owl Rock Capital Corporation's 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 an earnings presentation for the fourth quarter and year ended December 31, 2019. This presentation should be reviewed in conjunction with the company's Form 10-K filed on February 19 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 fourth quarter earnings call. This is Craig Packer and I'm CEO of Owl Rock Capital Corporation and Co-Founder of Owl Rock Capital Partners.So with me today is Alan Kirshenbaum, our Chief Financial Officer and Chief Operating Officer; and Dana Sclafani, our Head of Investor Relations. Welcome everyone who is joining us on the call today.I'd like to start by highlighting our fourth quarter results and providing an overview of our investing activities in the quarter. Alan will then provide more detail on our financial results and an update on our financing activities before I return with closing comments.Getting into the fourth quarter results. Today we are pleased to report another strong quarter performance. Net investment income per share was $0.37 for the quarter. We saw another quarter of robust origination activity and continue to maintain our strong track record for the credit quality. We ended the quarter with a net asset value per share of $15.24, up $0.02 from the third quarter as we continued to over earn our dividends. Our net investment income covered our dividend this quarter by approximately 106%.Looking forward for the first quarter, our Board has declared a dividend of $0.31 per share in addition to the previously declared special dividend of $0.08 per share for a total first quarter dividend of $0.39 per share, which equates to an annualized dividend yield of 10.2% on book value.Last quarter, we began the call by highlighting of public investment grade bond issuance we executed in October. Along with our continued focus on expanding our unsecured liabilities we are pleased to again access the public bond market last month, issuing $500 million of senior notes with a 5.5-year maturity. Alan will cover this in more detail later, but we continue to see improved financing costs as the public credit markets become more familiar with our story and expect to continue to tap these markets over time at attractive rates.I’d also like to cover an important milestone to place after quarter end, which was the first release of the share outcome. As a reminder, we issued 11.5 million primary shares at our IPO last July and 100% of our pre-IPO shareholders are subject to a lock-up on about 375 million shares outstanding. This lock-up provided for the release of one-third of these shares at six, nine and 12 months post the IPO.Approximately 125 million shares became freely tradable on January 15, increasing float to 146 million shares or approximately $2.3 billion at today's stock price. Another 125 million shares will be released from lock-up on April 14 and the last one-third will be released on July 18. As expected, following the lock-up release, we saw increased trading activity in our stock and believe it is positive for our shareholders to have a larger public float.Our IPO also included a number of shareholder friendly features, which remain in effect. These features include a $150 million 10b5-1 buyback program, which starts buying a share of the average daily trading volume when the stock trades below net asset value and which will run through February 2021.To-date we have not utilized this buyback and not a single share has been purchased as we have traded above NAV each day since our IPO. We also announced at the time of our IPO that the Board had approved a series of six consecutive quarterly special dividends, which began in the third quarter of 2019 and will run through the fourth quarter of 2020. Alan will remind you of the details later in the call.Moving on to our investment activity. The fourth quarter was another active one from an originations perspective with $1 billion of new investment commitments, $795 million of new investment fundings, and $526 million of net funded investment activity which was net of $269 million of sales and repayments. We added seven new portfolio companies this quarter and served as administrative agent on most of this origination volume.We also provided additional capital to three of our existing portfolio companies who are pursuing add-on acquisitions. We continue to be excited to support our portfolio companies as they seek additional capital for growth and are pleased to have a growing roster of incumbent lending relationships, which can drive future investment activity. While repayments remained modest this quarter, we expect to see them pick up in 2020. Of note, 100% of our new origination activity this quarter was first lien or unitranche term loans.You may recall that last quarter we saw increased second lien activity. As we noted then, our conservative investment posture to focus on first lien lending has not changed even though we may see a shift in market opportunities from quarter to quarter. This quarter we saw attractive unitranche opportunities and five of the seven new investments this quarter were unitranches.As we've highlighted previously, we like unitranche loans as they are first-lien loans with attractive spreads and the protection of $1 attachment point. As the size of deals and borrower demand for unitranches increases, given our scale and available capital, we believe we are well positioned to take advantage of these trends.This quarter we continued to see the benefits of our strategy. We are focused on the upper middle market and on primarily sponsor-backed companies. We believe our scale is a differentiating factor as we are able to leave or anchor deals between $200 million and 600 million in size.We remain highly focused on the quality of the book we are building. Our portfolio now stands at $8.8 billion of high quality directly originated senior secured floating rate loans across 98 portfolio companies. Consistent with historical quarters, the portfolio ended the quarter with approximately 81% first-lien positions of which unitranche positions accounted for 36% of the total portfolio.We continue to focus on large stable recession resistant businesses. The weighted average EBITDA of our borrowers was approximately $79 million at quarter-end remaining squarely on the upper end of middle market companies. We remain well diversified across the 27 industries in our portfolio. This quarter our exposure to the distribution sector increased to 8.6% making it our largest industry. We expect to see some movement among our largest sectors each quarter depending upon deal flow.I'd note the breadth of our industry groups for this quarter as we executed deals across six different industries. Further, no individual investment represents greater than 3% of the fully invested portfolio and our Top 10 positions now represent 24% of the current portfolio.The asset yield of our portfolio was 8.6% for the quarter versus 8.9% in the third quarter, which reflected the drop in LIBOR that we saw as a result of the Fed cutting rates. Although the lower rates reduced our asset yield, we are focused on minimizing the impact by seeking wider spreads.Weaker market conditions in the syndicated market helped us to successfully obtain wider spreads. The weighted average spread on new investments this quarter was 5.9%, which was very attractive given all investments were first lien or unitranche and we did no second liens which typically carry a higher spread. The weighted average spread of our portfolio is 6.3% overall, the highest of the last four quarters.To give you a sense of the deals we've done this quarter, I wanted to highlight two of our new investments. The first was a unitranche loan to support Kelso's acquisition of Individual FoodService or IFS. IFS is a distributor of foodservice and janitorial products and supplies. Across the Owl Rock platform, we committed to the whole full $250 million acquisition facility serving as administrative agent. We like the company given the attractive non-cyclical nature of the foodservice end market, leading share in the markets they serve, and revenue stability driven by the highly reoccurring product purchases.This quarter we are also pleased to support Harvest Partners' acquisition of Lazer Spot with a $325 million acquisition facility. Owl Rock led and structured the first-lien financing and served as administrative. Lazer Spot provides transportation services within distribution centers and manufacturing facilities.As the only national player, the company benefits from economies of scale versus smaller competitors and exposure to largely economically resilient end markets such as food, beverage, and consumer products. Both IFS and Lazer Spot have the attributes we like in our investments, businesses with attractive market positions in recession resistant areas structured with attractive spreads, maintenance covenants, and a reasonable loan to value ratio.In addition to our strong origination activity, we are pleased to report that we continue to have no investments on non-accrual status and since our inception in 2016 have not had any principal losses or defaults. We continue to closely monitor our portfolio companies for any signs of change in credit performance. As you'll see on Page 13 of the earnings presentation across our five-point internal performance rating scale, the portfolio mix remains consistent with that of previous quarters.We continue to see solid performance across our borrowers with growth in line with a modestly growing U.S. economy, which reflects our focus on recession resistant sectors that we believe help mitigate economic cyclicality. Once again, we are very pleased with our investment activity and portfolio performance this quarter.I will now turn the presentation over to Alan to cover additional detail on our financings and our quarterly results.

[Alan Kirshenbaum:]

Thank you, Craig. Good morning, everyone.To start off and you can follow along starting on Slide 6 of our earnings presentation. We ended the fourth quarter with total portfolio investments of $8.8 billion, outstanding debt of $3 billion, and total net assets of $6 billion.Our net asset value per share was $15.24 as of December 31st compared to $15.22 as of September 30th. Our dividend for the fourth quarter was $0.31 per share plus a $0.04 per share special dividend. And our net investment income was $0.37 per share over earning our dividend again.On the next slide, Slide 7, you can see total investment income for the fourth quarter was $202 million. This is up $14 million from the previous quarter or approximately 7%. We should generally expect to continue to see revenue increases for the next several quarters as we ramp back to our target leverage building up to approximately $10 billion in total investments when the portfolio is fully invested.As for expenses, total expenses net of our fee waivers for the fourth quarter was $57 million. This is up $7 million from the previous quarter or about 13%, which was almost entirely due to higher interest expense in connection with increasing leverage quarter-over-quarter. Our net asset value saw an increase of $0.02 per share this quarter. You can see a NAV bridge on Slide 8 of our earnings presentation.As you can see on this slide, the increase in net asset value was driven by over earning our dividend this quarter. As a reminder in connection with our IPO, we waived our best-in-class public BDC fee structure for five quarters to keep our industry low private phase fee structure of 75 basis points management fee and zero performance fee.The way you will see this flow through the income statement is our management and incentive fee expense lines in our 10-K will represent a 1.5% and 17.5% fee structure and the waiver line effectively a contra expense shown just under our total operating expenses in our 10-K reflects the portion of our fees that we are waiving.For the fourth quarter, we waived $41.7 million of fees. In total so far since going public, we have waived $73.4 million of fees. We are passing this fee waiver on to our shareholders in the form of the special dividends our Board has previously declared. For the first quarter of 2020, our Board approved a dividend of $0.31 per share, which we think of as our long-term dividend.As a reminder, our Board set this dividend with a long-term view at a level which we felt was an achievable conservative dividend level. In connection with our IPO, our Board also approved a series of six consecutive quarterly special dividends.You can see a picture of our dividend structure for the rest of 2020 on Slide 15 of our earnings presentation. These special dividends, effectively the fee waiver I just mentioned, is the shaded portion of each bar at the top of this slide. These started in the third quarter of 2019 and run through and include the fourth quarter of 2020.As you can see for each quarter of this year, the special dividend is $0.08 per share per quarter. So in 2020 alone, the total special dividends add up to $0.32 per share. This is effectively an additional four quarters' dividend that we're paying throughout 2020 on top of our regular dividends.As you can also see on this slide, we provided ourselves a ramp with our special dividends from the third quarter of 2019 through the first quarter of 2020 as we ramp back to our target leverage ratio. Again, all of these special dividends have already been approved by our Board of Directors for shareholders of record as of the last day of each respective quarter.On the back of another strong quarter of origination activity, we were able to continue to progress towards ramping back to our target leverage. As a reminder, leading up to our IPO we were operating at a 0.75 times debt to equity level and just prior to our IPO, we delevered to 0.24 times debt to equity as we called the remaining capital commitments from our private phase investors.We increased leverage to 0.39 times debt to equity by the end of the third quarter and ended the fourth quarter at 0.46 times debt to equity. Based on our progress this quarter, we currently expect to get back to our 0.75 times debt to equity target in approximately six months.As it relates to our financings, we were very active again this quarter. You can see an overview of all of our financings on Slide 14 of our earnings presentation. To sum up our activity here, we did another CLO takeout from one of our drop-down SPV facilities and we did two unsecured public bond issuances in October and January. We will continue to remain very active in both of these areas.As a quick overview, our initial public bond issuance repriced at 12.5 over five year treasuries and our most recent deal last month we priced at 220 over five-year treasuries, almost 100 basis points of spread tightening. We are clearly very pleased with this execution. I think there is still room for some further tightening in future issuances.These public bond issuances, priced at five and a quarter percent fixed coupon, 4% fixed coupon and three and three quarters percent fixed coupon. As a reminder, we swapped the first issuance to floating rate but have not swapped either of the last two deals due to the unattractive level of economics. There continues to be a negative carry to enter into swaps. We made the decision to not swap if the economics are not attractive and if the fixed rates are low enough. So under current market conditions, you should expect to see us to keep a portion of our balance sheet as fixed rate.I had commented a few quarters ago that our cost of debt would go up a little before coming down since we paid down our inexpensive capital call facility in connection with our IPO. Due to the recent financings I just mentioned, the CLO takeouts and unsecured issuances, our cost of debt has gone down as you can see on Slide 12 of our earnings presentation. The decrease in LIBOR of course has also added to our lower funding costs.So, to wrap up here with two closing points. First, as it relates to the build-out of our financing landscape, we feel very good about where we are today and what we have achieved to date. We have a diversified set of financings in place that are well matched from a duration perspective with the left side of our balance sheet.We are diversified across lenders and we are off to an initial good balance of unsecured bond issuances of about $1.5 billion and secured lending facilities of about $3.5 billion, which include our corporate revolver, drop-down SPV facilities, and have now completed two CLO financings, which are a very efficient way to finance the right side of our balance sheet.We will continue to focus on issuing more unsecured bonds and doing more CLO takeouts from our drop-down SPV facilities. Over time we expect that 50% or more of our financings could be an unsecured bonds. The overall financing conditions are strong so we believe we can continue to execute efficiently on this plan.Second, we put in place a number of shareholder friendly structural features in connection with our IPO that are all working well. These include our fee waiver, the special dividends, the lock-ups, and the 10b5-1 buyback program.Thank you all very much for your support and for joining us on today's call. Craig, back to you.

[Craig Packer:]

Thanks Alan.In closing, I thought I would touch on the current direct lending market environment. In the fourth quarter, market conditions in the broadly syndicated loan market were weak as the market experienced a risk off sentiment and investor appetite weakened for new issues due to global macroeconomic concerns.One benefit of the weakness in the public markets is that in the fourth quarter we saw some high quality investment opportunities shift away from the syndicated market to the direct lending market and also saw the direct lending market as a whole move towards improved spreads and documentation terms, which we were able to capture on our new investments in the quarter.We hope this trend would continue into the new year, however, the central banks have continued to signal commitment to low rates and the economy continues to grow modestly, the broadly syndicated loan market has strengthened alongside most other markets.In the short term, we expect this to remove some of the tailwinds from market conditions we had experienced in the fourth quarter. In Alan's earlier comments, he highlighted we expect to be back to our target leverage level of 0.75 times in approximately six months for the end of the second quarter.We had previously indicated that we would achieve this target at either the end of the first or second quarter, but are now trending to the wider end of that range given our current visibility on our deal pipeline. This reflects several factors. The first thing is generally slower activity level among financial sponsors. Those sponsors are plus with cash activity in the first quarter has been subdued.Additionally, we continue to be as we have always been highly selective on credit. However, as we move closer to being fully invested, we're even more focused on the return profile for incremental new deals and expect to pursue fewer lower yielding opportunities.Finally, we expect to see increased repayments as the portfolio continues to season. So for these reasons, we expect to get to our target leverage level on the longer-end of our original estimates. As most of you are aware, we've been quite successful in finding attractive new investments over the last few years and scaling our portfolio and we believe our franchise and capabilities are stronger than ever. We've been very successful competitively at finding deals we like and are confident we will continue to find high quality opportunities at attractive returns.We're equally comfortable that at this point in the cycle it is prudent to be highly cautious on credit selection and disciplined on capital deployment. In closing, while we don't want to be complacent, we feel we are operating from a position of strength. We've built a very strong franchise with a demonstrated track record of originating high quality middle and upper middle-market deals typically backed by premier financial sponsors.We continue to grow and invest in our investment team and portfolio management capabilities. We are just beginning to see the benefits of having a large number of incumbent lending positions, which should lead to incremental portfolio company growth. We believe we are a lender of choice for the private equity community and that was on display again this quarter. We are pleased with both our origination activity and financial results and are excited to continue to deliver strong returns for our shareholders.We are proud of what we have accomplished, but remain focused on maintaining our credit discipline and the overall quality of the portfolio as we look to further build on our progress. On behalf of myself, Alan, and the entire Owl Rock team; want to close by thanking everyone again for your time today and for your interest in Owl Rock. We look forward to maintaining an ongoing dialogue and keeping you apprised of our progress.With that, operator, please open the line for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Mickey Schleien from Ladenburg. Your line is open.

[Mickey Schleien:]

One question I wanted to ask is about fee and other income, which climbed quarter-to-quarter. Could you give us a little more background on what drove that increase?

[Alan Kirshenbaum:]

Sure. We had some paydowns downs this quarter and if you look back to 2Q, we also had a decent level of fee income coming through. As you can appreciate, it's a bit idiosyncratic, but we had a paydown with a couple of our portfolio companies; Hillstone, City Brewing, and on a smaller extent ConnectWise.

[Mickey Schleien:]

These are pre-payment fees then, Alan?

[Alan Kirshenbaum:]

These are the acceleration of OID and prepayment fees from Hillstone and then we took in the syndication fees on selling down some pieces of City Brewing and ConnectWise.

[Craig Packer:]

It's pretty much split evenly between OID and [indiscernible].

[Mickey Schleien:]

All right, I appreciate that. And could you discuss a little bit the outlook of Feradyne Outdoors and Give and Go? I noticed that their valuations are down quarter-to-quarter and I understand they are private companies, but any background you can give us on what's going on there?

[Craig Packer:]

Sure. Feradyne is a manufacturer of hunting products. It's owned by a private equity firm Snow Phipps. It's an investment we made in May of 2017. The company has struggled a bit, it hasn't certainly hit our expectations or Snow Phipps' expectations. They continue to be very supportive of it and put additional capital in. We've had some amendments. We still feel ultimately expect to get a part recovery on it, but based on its performance have felt it appropriate to market where it is. So, it's about all I can say on that one.And Give and Go, I believe that one actually marked up this quarter. It has a low mark so I understand why it might have crossed your radar screen. That's a company in the food space. It's controlled by T.H. Lee, a buyout firm. They've had some operational issues and some cost structure issues. It has a fairly large publicly traded first-lien term loan.We're in a fairly modest part of a smaller second-lien term loan. And I think there's probably folks you could tap into to get a broader view on how the company is doing. But in this past quarter its condition I would say had improved modestly and so we marked it up a little bit. Similarly we expect ultimately to get a part recovery there, but feel like it's marked appropriately.

[Mickey Schleien:]

[technical difficulty]

[Alan Kirshenbaum:]

Mickey, we can hear you.

[Craig Packer:]

We cannot hear you.

[Mickey Schleien:]

[technical difficulty]

[Alan Kirshenbaum:]

You're fading out now, Mickey.

[Craig Packer:]

We can barely hear you. Why don't we switch to the next question and maybe he can phone later?

[Operator:]

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

[Casey Alexander:]

But that's not the worst thing I've been called, Cathy, I have a couple of questions. First of all, have you guys been polling your portfolio companies to determine exposure to and potential supply chain issues from China and how do you feel about that looking through your portfolio?

[Craig Packer:]

The answer is yes. And while it's still early for sure, I would say we feel fine about where we are and we don't feel like we have any great degree of exposure. Our businesses are primarily US oriented businesses and we finance a lot of services businesses. If you look at some of our biggest sectors; healthcare, software, distribution; they're generally not businesses that have big global industrial supply chains. We have a few that we are going to pay close attention to.So, I don't want to say it's - there's no exposure or that we are complacent on it. But I would say one of the virtues of lending to a BDC is it's primarily US businesses and we particularly are more oriented towards service businesses which we generally think are more recession resistant than big industrial businesses that are going to cycle.

[Casey Alexander:]

Well, thank you for that. And I'm sure you can appreciate that's probably a question that we're going to have to ask almost every BDC just a matter of course given what the current conditions are. On your cost of debt, does that cost of debt at 4.6%, does that include be unused fees?

[Alan Kirshenbaum:]

Yes, it does.

[Casey Alexander:]

Okay, terrific. Well, I mean it appears as though you guys are controlling everything that you can control except for LIBOR which we realize is out of your control. Craig, you discussed that you like unitranche and you kind of characterized it as first lien whereas I've always thought that kind of the definition of unitranche is something that combines first lien and second lien exposure. So when you describe it as first lien, are you talking about its location in the capital stack or in your unitranche it's kind of the attachment point that doesn't actually reach into the land of second lien?

[Craig Packer:]

Sure. So, I'll be as clear as I can. Look, unitranche is a term of art. Different lenders will call different instruments unitranche. There's no universal definition. When we describe unitranche, we're describing an instrument that has the following characteristics. It's a first-lien term loan. However, the leverage level for that loan extends to a point which is more typical of second lien or something beyond a typical first lien.So it's - as a contractual matter, it's first-lien debt. There's no doubt ahead of it. It's got first claim on the company's assets. However, we acknowledged by calling it unitranche that it's a higher leverage level then would be typically the case of first-lien loan. Historically in the space, folks would do unit tranches and then in an effort to boost the return on that loan, they would sell what's called a first-out position or an additional loan within the unitranche itself to another lender at a lower spread. So, they would boost the return on the remaining last out piece.At Owl Rock, we typically have not done that. We've done it once or maybe twice because we prefer to just control the entire loan. And so for us, it is a first lien. We call out the percentage because I know you and others find it helpful to know exactly how much unitranche there is and so we call that percentage out. As I said a moment ago, we like it because you're getting the blended rate between a first and second lien, however you're attaching $1.So to the extent that there's an issue with the credit, you have all the downside protection of being a first lien lender. And as I said a moment ago, we don't typically have a first out lender in there so we don't have any lingering inter-creditor issues that I know some folks have concern on.So, we're not trying to be cute at all of the words. It is first lien, but we also make a point of highlighting what percentage. We also disclose in our 10-K exactly how much unitranche we have so you can check that number every quarter - we do it quarterly so every quarter you can see exactly how much we have. Different lenders may characterize the same loan as unitranche or not unitranche because the judgment of how - of the leverage point is just subjective. So, does that help?

[Operator:]

Our next question comes from the line of Mickey Schleien with Ladenburg. Your line is open.

[Mickey Schleien:]

Can everybody hear me?

[Alan Kirshenbaum:]

We can, Mickey, yes.

[Mickey Schleien:]

So, I just wanted to follow up. Alan, you're carrying pretty good amount of cash on the balance sheet over $300 million. I understand there's a lot of moving pieces there and it could be a timing issue, but obviously that's not optimally efficient, Alan. What kind of run rate can you expect in terms of your cash balance?

[Alan Kirshenbaum:]

And you're right, Mickey, it is a bit idiosyncratic. It gets driven largely by two factors. One, we have a series as you know of drop-down at SPV financing facilities in place and we run quarterly waterfalls that release the cash from those facilities and that happens I think shortly after quarter-end. And the other part of that is just idiosyncratic based on what the timing of when deals are funding and we could always have a little more or a little less if we're closing a deal immediately after quarter-end.

[Mickey Schleien:]

And my last question, curious how disposed the Board is to consider raising the target leverage given the portfolio structure and current market conditions and obviously your relationships with your stakeholders, including the credit rating agencies?

[Craig Packer:]

Sure. Candidly, management has not engaged the Board with that discussion. As we've outlined here today, we are still working our way back to our target leverage level. We've got some work to do to get to that level, much less considering an increase. This is a topic we talked about a lot in the context of our IPO, where we delevered quite significantly. We have very much placed a strategic priority - at keeping access to the investment grade bond market. We were very fortunate to be able to get investment grade ratings very early in our lifecycle as a private BDC before we went public.And we are - very much value that - those ratings and as we've highlighted, we've tapped that IG bond market on multiple occasions. And so it’s strategically important that we not do anything to disrupt on that ratings profile, given where we are given the return profile. We were able to generate. We feel like we've got the right balance with our current leverage targets. So it's - not something we've even discuss with the Board. So I certainly wouldn't want to characterize their disposition to it. We feel like we're in the right place right now.

[Operator:]

Our next question comes from the line of Chris York from JMP Securities. Please go ahead. Your line is open.

[Chris York:]

So Craig, we often hear from peer BDCs that both terms and yields are growing more borrower friendly some of these peers tend to attribute this to big new entrants. So how should investors reconcile this comment with your growth as a big new entrance, but the fact that other BDCs tend to continue to seek your deal flow and they're often clubbing with you on many deals?

[Craig Packer:]

Well, that's a great question. Look, I guess what I would say rather than - really answer your question. You're making an observation which I would share, but - rather than talk about what our competitor is saying, I guess - I'll just tell you what we're seeing. What I think has been happening over the last few years is the private equity community is becoming more and more comfortable with direct lending solutions.In part because they are much bigger pools of capital available to provide them from firms like ours that have trusted relationships with those sponsors, really big investment and investment team. The ability to provide solutions that are not, only competitive with, but in many ways have attractive features relative to the syndicated market. And so, they're doing more and more deals with direct lenders like Owl Rock.And yes, I think we are - a leader in that because we've built a business around - provide being a great partner for financial sponsors. Every investment we make has to pass our credit spectrum first and foremost. We continue to close on less than 5% of the deals we look at. We care deeply about documentation. We're quite experienced at that. We negotiate our documents bilaterally with the sponsors. There is no bank in the middle.We almost always lead our deals and we care about leading our deals because we get to control that documentation. The vast majority of our first lien term loans have maintenance covenants and the return profile, you can see for yourself. We just reported our results, and we think our returns for the risk in our portfolio, we think offers very attractive risk reward for our shareholders.As for our competitors and what we're saying, you have to ask them. I think that - as a new entrant, I understand that we've come in, to a market and there maybe some jealously or frustration around that and maybe that reflects itself in some folks comments. But as you noted, many of those competitors are coming into our deals. So you have to ask them how they reconcile that.

[Chris York:]

Fair enough. I wanted to switch gears, so - or the manager recently received investment by Dyal. So does that recent investment provide external manager with opportunity to grow the platform, which could allow you to potentially increase the origination team, maybe even expand into specialty niches? So, could you just comment on that potential opportunity and what those growth opportunities could be?

[Craig Packer:]

Sure and the answer is yes. And the reason we took the investment from Dyal all that capital is going to be used to help grow the Owl Rock platform. As folks know, we really bootstrapped Owl Rock my partners and I with our own capital. We did take outside investors start the firm. We have today still $112 million personally invested in ORCC and more than $200 million invested in the various Owl Rock funds. So we have tremendous personal commitment. We've had great success at growing our platform. We continue to find investors that want to invest with us and borrowers that want to borrow from us. And so, we intend to use the dollar proceeds to continue to grow our platform.What we've talked about generally is additional investment in direct lending product. We'd like the direct lending space. So, I would expect new funds that we were to launch to be in the direct lending arena, leveraging the relationships we have in our underwriting process and not get into much more far flung areas, but we should - you should absolutely expect to see us continue to invest in our team both the investment team, origination, credit, underwriting, portfolio management and we'll continue to do that.So I think it's a positive we've highlighted up here and in - other cases we've highlighted that our size of our platform and ability to write a large check is - we think is a huge competitive advantage. So, I think all - the investors and all of our funds will continue to benefit as we grow.

[Chris York:]

Makes a lot of sense. Could you elaborate, maybe and just let us know what the FTE number of full time employees were at the platform at the end of 2019 and then maybe the year-over-year growth?

[Alan Kirshenbaum:]

Sure, Chris. We're at about 140 employees today and a year ago, we were probably in the 80 to 90, 95.

[Chris York:]

Awesome, thanks Alan. Next question is on your second lien. So the portfolio mix hasn't moved materially over the last year, but I do know that you guys are comfortable taking that mix as high as 40%. So how should investors think about the expectation for any changes in the portfolio mix going forward in today's environment?

[Craig Packer:]

Sure, so just to remind folks of the history here when we started investing in 2016. Obviously, the portfolio at that point was not skilled, but in that first year or so you'll recall we were as high as 40% second lien. Today, it's really low on second lien is sub 20%. I think at this point the credit cycle, we are very focused on being defensive and doing only loans that we're extremely confident are good loans and that will withstand the cycle.And so that has led us to drive our first lien up to north of 80%. And we don't have an expectation that will change in the near term given where we are in the economic cycle. Second liens offer an attractive spread when we do second liens, we typically only do them in very large upper middle market companies that have significant equity cushion beneath us and typically and businesses that we don't expect to cycle or have any volatility, so that we don't find ourselves in a disadvantaged position.If we found those in this environment, and we could get an attractive spread we would do them. So, but we haven't seen that many of those in the third quarter we happen to see three. We did them in the fourth quarter we didn't see any we didn’t do any. So, I think in the near-term, I would expect us to be in the - low 20s, high-teens, but I don't want to - I don't have a crystal ball.And so, the market cracked in this middle of this year and we saw bigger opportunities and we thought it was prudent for our shareholders to take that percentage up to the high 20s. We would do that, but I don't expect that to happen, but I wouldn't rule it out if market conditions allowed us to do it. We don't imagine anytime soon, we've got to 40%. So, I think in the 20s is probably where we'll live. Certainly, we'll have update calls between now and when we make it to 30% given, we're at only - reaching 19% today.

[Chris York:]

That context and insights is very helpful. Last question just housekeeping, interest coverage was 2.5 times at year end 2018 for the portfolio. What was the year end interest coverage for 2019?

[Alan Kirshenbaum:]

I think we're going have to do - I think we're going to - we have a lot of folks here, but - nobody's refinanced that question we’ll be happy to give you a call offline and provide that to you, sorry.

[Operator:]

Our next question comes from the line of Robert Dodd with Raymond James. Please go ahead. Your line is open.

[Robert Dodd:]

On Craig, what are your comments in the prepared remarks at the beginning was - you expect [we paid activity] to pick up in 2020. Generally, we know - repayment, if repayment activity accelerates in periods, where spreads are compressing and given that some of the other typically - and given some of the other color you gave about less low yield loans et cetera?I mean can you [reconcile] is that the right way to think about it that repayments could accompany compressing yields and how far are you willing to go - by yields I mean spreads really you don't control LIBOR. How far are you willing to go on that spread I mean this quarter obviously portfolio spreads were up new investment spreads were down slightly. So your repays were on the - some of the lower spread investments, but can you reconcile all that for us?

[Craig Packer:]

Sure I guess I would gently adjust the sub position of the way you asked the question. I don't - our repayments while certainly rate, the rate environment will impact the company's ability to refinance us. There are a lot of other factors that drive that decision. Oftentimes we get repaid when the portfolio company gets sold. It may get sold to another financial sponsor, may get it sold for strategic, maybe it will go public.There will be some corporate catalyst, where the company is revisiting its capital structure. Oftentimes that's driven by the company's success. The company sponsor might have done an LBO we financed it, it's grown, and so it's credit profile has improved. So yes regardless of market conditions, it may get a lower cost of financing just by virtue of the fact the credit environment - the credit has improved.Maybe the company has grown large enough to go to - syndicated market to take us out. Maybe it’s a second lien and they decided to do all first lien structure because the leverage has improved. Just a lot more of that goes into it then purely the rate. Obviously, rates can help companies refinance. But I would say, and I don't. This is in scientific at all, but I say generally speaking, that is not what's been happening.It's improvement in the credit or sell the company that's driving refinancings. So I guess that's what I think will drive the reason why common hours will increase is because our portfolio is still relatively young in our repayments are still relatively modest. As you know, our loans are typically five to seven years. We assume on average they're three-year life. We have started investing in 2016.But obviously our pace of investment has picked up considerably in 2017, 2018 and 2019. And so, it's natural and we would expect to have our repayments increase just as companies go to refinance. Companies don't generally even if their business hasn’t improved and the rate environment hasn’t improved companies generally don't like to wait until their maturity to refinance their debt.And so companies in our portfolio that have done just fine and are given just refinance at the same exact spreads we’ll do that early and we would expect to obviously be well positioned to do that given our incumbency. So, I don't think, I just answered your question, but I think that's how I think about it.

[Robert Dodd:]

Got it, no that does answer the question. I appreciate and then one follow-up to Chris question on [Dyal and Dual], you answer to that. I mean you said that all investors all funds could benefit from expanding the platform into tangential areas of private credit, which would sense good. How much - in the event if you do add another vertical for lack of a better term to the platform as a whole if that's eligible from your thought process to go into ORCC?How much kind of heads up, would you give to investors about any change in type of assets I mean, even if they are high security it might be different kinds. So - can you give us any color on how much notice investors and shareholders would get about changes in any kind of mix concept at the BDC even if it's the same security level or whatever?

[Craig Packer:]

Well, I'm not sure I am totally following your question. But I would say is ORCC's a public company. We take our responsibility about disclosure and our strategy and what we intend to put in the fund quite seriously. We have these calls and obviously we speak to you and the research analysts and our investors on a regular basis. And our strategy is sort of well-defined and laid out to the extent that we have additional funds underneath the Owl Rock and the Owl Rock platform.We today and will continue to invest deals across funds of subject to our SEC exempted relief. We have a very, very thorough detailed allocation policy that governors that, but we think it's an advantage of our platform to be able to put deals across the different funds and I don't want to - I don't want to spend too much time talking about what other funds might be or with the strategy might be.But just to say, to the extent that we have a fund that had a different strategy than ORCC, those investments going out funding. We're not going to alter ORCC's strategy just because there is a different fund under the Owl Rock platform that - and it might have a different flavor to it. So I certainly wouldn't want to raise any concern for folks on our call that because we're going to grow our platform that would change our strategy or strategy at ORCC's, it's very clear and we're executing on it.

[Operator:]

Our next question comes from the line of Ryan Lynch with KBW. Please go ahead. Your line is open.

[Ryan Lynch:]

First one, you guys kind of talked about some opportunities in the fourth quarter coming from the broadly syndicated loan market of those guys there that are now taking the direct lending route. I'm just curious of those borrowers that have or may be choosing the direct lending route versus the broadly syndicated loan route, are they bringing over kind of the terms covenants and structures of the broadly syndicated loan market to the direct lending market or are you able to negotiate slightly better terms and structures on those crossover loans.

[Craig Packer:]

Sure, but I'm glad that you asked that because I think this is a topic that there is not - there is some confusion on. When we make a loan, regardless of what the borrowers are terms are, we structure that loan to our satisfaction. Vast majority of our first lien term loans have maintenance of events. As you know, the broadly syndicated market almost all of it is covenant lite.And in addition to the maintenance covenants, our documents are quite extensive and govern everything about the company. I must say can borrow, liens they can put on, dividends they can pay out, everything, it's 100 plus page documents and we spent incredible amounts of time negotiating every aspect of it.When a borrower chooses a direct lending solution they are agreeing to a much tighter documents and they would have in the broadly syndicated market. But they're getting some benefits from that. We provide certainty. While the syndicated market, it doesn't provide certainty, their deal execution depends upon market conditions.We hold the paper, broadly syndicated market doesn't hold the papers, you don't know who your lenders are. So sponsors are choosing to live with tighter documents and higher spreads and exchange for the certainty and the direct lending relationship that they value.Our economics are clear. You can see what they are, we get a premium, not only in terms of the spread versus where initial could potentially borrow and the broadly syndicated market, but we also get OID which typically would be given to the banks that are arranging the financing, the combination of that additional spread plus the OID, we think is very attractive and one of this core virtues of direct lending along with the improved documentation.And lastly and maybe most importantly a much more detailed level of due diligence, we got to do on the borrowers versus the broadly syndicated. So as a package, I feel really good. We're delivering to our investors on a much more attractive package, than they could otherwise get investments in the broadly syndicated market.The sponsors are finding that trade off, attractive. Again this is at a time where markets are generally quite strong. We've gotten a period where markets were more volatile. They find it even more attractive.

[Ryan Lynch:]

And then in your prepared comments, you had mentioned, you guys are trying to seek some wider spread loans to help offset the decline in LIBOR. Can you just provide a little color on how you're doing that just because it doesn't seem as an overall spreads in the market or changing meaningfully? So how do you guys intend to seek wider spreads, how do you accomplish that?

[Craig Packer:]

Hope it's like anything else, you've got it long. You've got to find the credits that you like. And you've got to find an economic package that you're willing to do. In the fourth quarter, we were able to do that on. As I've signaled when the - in the first quarter, it's harder, but it's going to move up and down based on market conditions, not only the public markets but general amount of capital, general amount of field, the supply demand for deals and financing.We want to get properly compensated for our capital. Our first and foremost is credit, but we want to also make sure as we put dollars out, we're getting properly compensated for it. We had good success in the fourth quarter is pushing for additional spread as the market is heated up in the first quarter, that's harder. It's going to move up and down quarterly, monthly depending upon market conditions. There's all sorts of things that disrupt the market.Again, it's all on the margin. When the sponsors are buying a company, another 25 to 50 basis points, generally speaking is not going to have a profound impact on their IRRs. We think it's important for our shareholders that we push to get the most attractive spreads that we can. And so we'll continue to do it. It's a battle on deal by deal basis. So that's - I guess that's the best I can characterize it for you.

[Operator:]

Our next question comes from the line of Finian O'Shea with Wells Fargo Securities. Please go ahead. Your line is open.

[Finian O'Shea:]

It's been a lot talked about today, which I appreciate. Just on a portfolio company, ConnectWise you re-recapitalized upsized at this quarter. Just a question on the spread there is 600 versus 550, can you break that down for us in terms of how much was the market widening you look forward versus anything on leverage attachment point, structure and so forth.

[Craig Packer:]

I don't think it's appropriate to get into too much detail on any one deal. I'll just say generally. There are things that happen - portfolio company's sponsor may come to us in the context of an acquisition or doing additional financing and similar to pricing, a new deal we made from time to time adjusted spread it up or down based on what they're doing without getting into any anything - on ConnectWise. I don't think anything market driven was happening there. That was specific to the credit and we've reached an adjustment in the rate with the sponsor it is what it is.

[Finian O'Shea:]

And you mentioned some - there were some syndication in fee income related to that, was the BDC able to retain all of the upfront fees on the circumstance or was there a split with the advisor.

[Alan Kirshenbaum:]

So I think that might go back to my comments. I was referring to income at the BDC tuck-in in the current quarter and my comments were accelerated OID and prepayment fees, when company pay down in part or in full. And also from time to time, we will sell-down positions from a risk perspective and from time to time, the BDC warrants syndication fees on those sell downs and we saw a little of everything I just mentioned in the current quarter.

[Finian O'Shea:]

And just on the matter of the upfront fee, as you have scaled up materially now and soon, you’ll sort of revert to the market fee structure. Can you give us an update on how you look at the capital structuring fee whether that goes to the advisor or the BDC?

[Craig Packer:]

Sure. I mean, Finn - as we've talked about with you in past quarters, I mean there is no - there is no relationship between the fee structure we're charging on the fund and how we might handle fees on an individual deal. They're just not related to each other as we've disclosed. And as we've talked about on this call with you, we from time to time we'll take fees to the advisor per certain services, the advisor performance for the companies.We've talked about that as a practice that we have. It's only done in selected circumstances, and certainly not done on every deal or anywhere close to every deal, but we do it on selective basis that process has been in place, we've talked about, it's going to be ongoing. It's nothing to do with our fee structure and it's not, there is nothing new really to talk about there.

[Operator:]

[Operator Instructions] Our next question comes from the line of Kenneth Lee with RBC Capital Markets. Please go ahead. Your line is open.

[Kenneth Lee:]

Wondering if you could elaborate on your prepared remarks on seeing slower activity among sponsors, wondering how much is due to seasonality and whether you expect to see some kind of pick up as the year goes through. Thanks.

[Craig Packer:]

Sure. Of the sponsor activity will go up and down, I don't, may be different views, even in this room on this. I don't think it's seasonality. I just think it's a little bit of a slowdown in sponsor activity, sponsors have tremendous amount of capital and they would like to be deploying that capital.So I don't think there's any change in their disposition, but they can only put capital out when they find new opportunities and I think that what you're seeing in the first quarter is just less deal flow. It could change quickly; it could change on a dime. But we saw it based on what we're seeing. And again, we're midway through the quarter, we thought it was appropriate to flag that it has been slower, this quarter, I think that's consistent with what other of our peers are seeing as well.I don't expect that to be some a prolonged period of time because they have capital, they've raised that they want to deploy, and economic environment is still attractive, valuations are still attractive. I think it's just idiosyncratic for where we happen to find ourselves in the first quarter of 2020.

[Operator:]

There are no further telephone questions at this time. I'll now turn the call back to Craig Packer for closing remarks.

[Craig Packer:]

Great. All right, well, thanks everyone for dialing in. Thanks for your questions. We're always available, if you have additional questions then just reach out to us separately. We appreciate your time and look forward to seeing and speaking with you soon.

[Operator:]

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