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spk05: Welcome to the Blackstone Secured Lending First Quarter 2022 Investor Call. At this time, all participant lines are in listen-only mode. If you wish to ask a question later in the call, please press star 1 on your device. If you need operator assistance, kindly press star 0. Please realize that the call is being recorded for replay purposes. With that, I would like to hand the call over to Michael Needham, Head of Investor Relations. Please go ahead.
spk06: Thanks, Shandor. Good morning and welcome to Blackstone Secured Lending's first quarter call. Joining me today are Brad Marshall, Chief Executive Officer, and Steve Kuppenheimer, Chief Financial Officer. Earlier today, I wish you to press release with a presentation of our results and file their 10-Q, both of which are available on our website. I'd like to remind you that today's call may include forward-looking statements which are uncertain and outside of the firm's control and may differ materially from actual results. We do not undertake any duty to update these statements. For some of the risks that could affect results, please see the risk factors section of our 10K and 10Q. This audio cast is copyright material of Blackstone and may not be duplicated without consent. On to our results. We reported gap net income of 63 cents per share for the first quarter and net investment income of 61 cents per share. With that, I'll turn the call over to Brad.
spk07: Great. Thanks, Michael, and good morning, everyone, and thanks for joining our call this morning. BXSL, as Michael reported, a strong first quarter, highlighted by 2.4% quarterly total return based on NAV, along with outstanding credit performance and a well-covered dividend. That brings our inception-to-date annualized total return based on NAV to 10.1%. While we'd be pleased with these results in most markets, what's truly remarkable is that this happened during a quarter in which equity and credit markets declined materially, with the S&P 500 down 5% and the S&P leveraged loan index down 0.1%. As we have highlighted in the past, VXSL was built for challenging market environments like the one we find ourselves in today. By leading the market with low fees and expenses, We can take less portfolio risk and drive more defensive returns for investors over time. The XSL is not only focused at the very top of the capital structure with 98% of the portfolio invested in first lien senior secured loans with less than 50% loan to value, but also focused on investing in larger companies with more durable business models in industries with strong secular tailwinds. As compared to other scale BDCs, defined as those with more than 750 million of assets at year end, BXSL has the lowest fee structure, the highest first lien senior secured focus, and the lowest concentration of assets on non-accrual at zero. In the first quarter, we delivered a regular dividend of 53 cents per share, which increased from 50 cents starting in the fourth quarter. That higher regular dividend was well covered by net investment income, with a dividend coverage ratio of 115%, despite a market environment characterized by lower deal activity and lower prepayment fees. In addition to our regular dividend, there were two special dividends in the quarter, totaling 25 cents, and we have declared two more special dividends to be paid later this year for an additional 40 cents per share. excluding the impact of special dividends, NAV would have increased 0.4% during the quarter. While BXSL's performance was steady during a volatile first quarter, we are most excited about what lies ahead. Even though there may be macro economic headwinds on the horizon, we believe that BXSL's defensive portfolio composition and attractive liability structure make us well positioned for an environment of rising inflation and rising interest rates. So today I'd like to cover a few key themes before turning it over to Steve to review our financial results. First, I'll discuss our robust investment platform enhancements we're making on that front. Second, the defensiveness of our portfolio in the current environment. Third, potential income upside over time from higher interest rates and from normalization of prepayment income over time. And fourth, our operating team, Blackstone Advantage, is an important tool in most environments, but especially in today's environment to help companies mitigate inflationary pressures. Starting with our BDC franchise, we have vast pools of capital as the largest BDC manager in the industry. BXSL benefits from that because it can finance large transactions for high-quality companies when it has available capital. Year-to-date, Blackstone Credit committed to 10 mega Unitron transactions with deal values exceeding $1 billion. In the past 12 months, Blackstone Credit led or was the largest lender to $17 billion plus transactions. Blackstone has further cemented itself as the market leader for the largest private financing. Our BDC platform was recognized by private debt investors earlier this year as BDC Manager of the Year, along with winning Global Fund Manager of the Year and Deal of the Year in Americas for one of our large transactions. Across Blackstone Credit, there are over 400 employees, 15 regional offices around the world, deep sector teams, and over 2,300 corporate debt investments. That gives us tremendous insight origination, and overall connectivity in the credit markets. Across the larger Blackstone platform, with over 4,000 employees and nearly 1 trillion in assets under management, that connectivity is multiplied many times over. For example, BXSL's investment team has access to over 100 Blackstone senior advisors across various areas of expertise. And it's not just the scale of Blackstone, but how we leverage it to advantage our investors. As Blackstone's credit capital base has expanded, it has invested in more capabilities that benefit DXSL across origination, sector expertise, and other support areas. Blackstone Credit is also meaningfully expanding its headcount by targeting over 100 new hires by year end, which will bolster our origination, and sector expertise, including enhancements to our technology and healthcare verticals where we see attractive long-term opportunities. Those verticals also happen to be BXSL's largest sector exposure today. Second, BXSL's portfolio was designed to protect investors' capital in challenging market environments. As of quarter end, none of our portfolio companies are on non-accrual. And in aggregate, our companies are experiencing healthy revenue and EVTA growth, as well as expanding margins. However, the overall business environment has undoubtedly become more challenging. Inflation is at a 40-year high in the U.S. Supply chains are disrupted in certain areas, and interest rates are rising along with financing costs. We expect those challenges to be felt unevenly across the economy. with some areas more protected, especially where revenue growth can offset inflation pressure. We believe other areas, such as certain industrial businesses, will bear more of the brunt given capital expenditure requirements and rising input costs. We believe these risks generally are amplified as you move into smaller companies and as you move further down the capital structure into, secondly, an unsecured debt and equity. The advantage we gained from being part of the Blackstone platform is that we get an early read on economic trends and inflection points from many thousands of investments managed across the firm. In this case, we saw inflationary pressures developing and built our portfolio around that theme. We've largely avoided secular disrupted businesses, which protect us as debt holders. Most of our portfolios comprise of non-cyclical sectors And our privately originated loans have an average loan to value of 44% with significant equity and subordinated debt below us. We've built a largely senior secured portfolio and focus on lending to larger companies that have more pricing power, more experienced management teams, and are backed by sophisticated sponsors with financial and operational support. Looking ahead, we feel very good about the quality in the resiliency of our portfolio. Third, we see income growth potential over time from rates and prepayment fees. Our asset liability profile enables BXSL to benefit from rising interest rates. Nearly 100% of our debt investments are floating rate, and nearly 60% of our liabilities are fixed rate at an average interest rate of 2.97%. we decided not to swap those liabilities back to floating, giving us powerful upside earnings potential, while still protecting us to the downside with interest rate floors on our assets. Since our earnings call last quarter, short-term interest rates have increased significantly, with three-month LIBOR increasing from 21 basis points to 96 basis points out of the quarter end and 140 basis points today. Short-term interest rates are now above BXSL's interest rate floors, which have averaged 84 basis points on all our investments. Given the significant quarter-to-date move in LIBOR and the timing of rate resets, we expect most of the benefit from recent moves to begin in the third quarter of this year, given the timing of three-month LIBOR contracts rolling over. Based on quarter end LIBOR, we estimate that 100 basis point increase in LIBOR would result in incremental earnings per share of 9 cents per year, 18 cents from a 200 basis point increase, and 28 basis points from a 300 basis point increase. Since quarter end, rates have already increased by 44 basis points. While spreads may compress in a higher rate environment which could partially offset the benefit from rising from higher rates for BXSL. This will come as the portfolio turns over, which will drive incremental income from prepayment fees. In the quarter end, investment activity was fairly light, driven primarily by our desire to maintain leverage at 1.25 times. On the positive side, we are able to optimize BXSL's investment activity around its capital availability. which was limited due to lower prepayment activity. The flip side to that is that prepayment income was at a historically low level for BXSL due to this lower portfolio turnover. Prepayment fees accounted for only one penny of our 61 cents of net investment income. Even if those fees were zero, we would have meaningfully covered our dividend. While prepayment fees could remain subdued over the near term, we expect that that coverage will grow over time with rising rates. Fourth and lastly, our Blackstone Advantage program is helping our companies combat inflation. Last quarter, we talked about how we believe in delivering a superior value proposition to our board. One of those services is expense reduction through procurement. which has been in high demand given rising costs and supply chain bottlenecks. We believe we can help mitigate those pressures on our borrowers by taking an active role. For example, one of our portfolio companies was experiencing challenges obtaining raw materials and controlling its overall cost inflation. We've been working closely with that company to leverage our group purchasing offering as well as building out RFPs and supplier auctions on their behalf. So far, we've helped them identify more than $3 million of cost savings. We're also helping, we're also working to map their carbon emission footprint, procure energy resources, and identify renewable energy projects, all of which should lead to reduced costs and lower emissions. Across the Blackstone credit platform, we've identified total annual savings of nearly $200 million for companies through this program. which has created billions of dollars of enterprise value for our sponsors. I'll close by saying that I'm extremely excited about what lies ahead for BXSL. We've built a high quality portfolio that is designed to withstand challenging environments and deliver an attractive, durable yield. Our platform is unmatched in scale, sourcing, and providing operational support to our companies. And Blackstone is investing even more into that platform. We think that BXSL represents the best version of a public business development company with stable, high-quality, defensive portfolio that is well-positioned for this environment. Pairing that with a low-cost structure and attractive upside from higher interest rates creates a powerful economic engine that we believe will drive strong results for our investors going forward.
spk11: So with that, I will turn it over to Steve.
spk01: Thank you, Brad, and thank you all for your time today. BXSL produced very strong results for the first quarter of 2022 and is well positioned for the current market environment. Today, I'll focus on a few topics highlighting these themes, including our financial performance, our investment activity and evolution of our portfolio, and our liability structure. In terms of yields and returns, we generated a dividend yield of 8.8% over the last 12 months based on quarter and NAV, which included a regular dividend of 53 cents per share and two special dividends totaling 25 cents per share in the current quarter. Turning to our balance sheet and dividend performance, BXSL ended the first quarter with total portfolio investments of $10 billion, outstanding debt of 5.6 billion, and total net assets of $4.4 billion. Net asset value per share decreased from $26.27 to $26.13, primarily due to our $0.25 of special dividends, which were paid entirely from accumulated undistributed net investment income from prior quarters. Excluding the impact of special dividends, NAV per share was up $0.11, or 0.4%, from a quarter ago and up 3.2% from a year ago. We continue to out-earn our regular dividend with net investment income. In the current quarter, our NII of $103 million exceeded our regular dividend by $13 million, or a dividend coverage ratio of 115% for the quarter. In addition, we had $5 million of net realized and unrealized gains, driven by a realization on our equity investment in Corpins. The $103 million of NII represents 61 cents per share, which was down from 67 cents per share in the prior quarter, mainly driven by a lower level of prepayment fees, but also still well in excess of our regular dividend level. Focusing on our assets, our total investment portfolio at fair value at the end of the quarter was $10 billion, and we had total assets of $10.3 billion. As of March 31, 2022, the weighted average yield on our debt investments and other income-producing securities at amortized costs was 7.3%. VXSL's gross investment activity during the quarter was slower, given this was our first quarter of being fully drawn and invested. During the quarter, the company made $278 million of funded investments, offset by only $33 million of sales and $100 million of repayments, for net investment activity of $145 million. Although our quarter-over-quarter portfolio statistics are relatively similar, I would like to summarize the evolution of the portfolio on a year-over-year basis as it helps to frame the picture around how well BXSL is situated for current and expected market conditions. Compared to the first quarter of 2021, the number of portfolio companies is up 71% from 89 to 152. The average EBITDA of our borrowers is up 91%. from 67 million to 128 million, while the average LTV of our borrowers has remained constant at 44%. In addition, the first lean percent of the portfolio and floating rate exposure in both the first quarter of 2022 and the first quarter of 2021 was 98 and 99.9% respectively. Altogether, this means we have added material diversity and quality to the portfolio through more individual credits and larger borrowers while not compromising risk based on loan to value or first in concentration we continue to be diversified across industries as we ended the quarter invested across 35 different industries which is consistent quarter over quarter as of quarter end our largest exposures are in healthcare software and professional services each of these are industries where we continue to see strong tailwinds economic growth and well-positioned companies backed by strong sponsors to lend to now moving on to our capitalization liquidity our balance sheet is comprised of efficient diversified sources of capital including a significant amount of fixed rate unsecured debt as of quarter end 56 of our debt outstanding was in the form of unsecured bonds which provides the company with significant flexibility and cushion as well as the potential for additional earnings upside as rates continue to rise, as Brad mentioned. Of our 6.3 billion of committed debt, 5.7 billion of principal was drawn. Of that 5.7 billion, 3.2 billion represent unsecured bonds, which again, as Brad mentioned, have an average coupon of just under 3%, and maybe just as importantly, have a remaining weighted average life of about 4.4 years. And we, as Brad mentioned, we did not swap these bonds. This means that we have a very low unsecured cost structure for the next several years forecast. At the end of the quarter, our average debt to equity ratio was 1.28 times. And I'm sorry, we ended at 1.28 times. Average was 1.25 times, which is consistent with our near-term goal to operate with leverage at the high end of the range of one to one and a quarter times. This active balance sheet management allowed us to continue to keep our cost of leverage down with an average cost of debt over the quarter of 2.9%. Additionally, we have a low level of debt maturities over the next few years with our nearest maturity in 2023 and the weighted average maturity of our liabilities at four years as of quarter end. We ended the quarter with $569 million of undrawn debt capacity. As part of the IPO, A share repurchase program equal to $262 million, or the size of the IPO, was put into place. The program is formulaic and is triggered if BXSL shares trade below net asset value. The program was put in place because we believe that if our common shares trade below NAV, it is in the best interest of our shareholders to reinvest in the portfolio. Though there were no repurchases in the first quarter of 2022, since the stock price never traded below NAV, the repurchase program has been activated on a few trading days subsequent to quarter end, but the vast majority of the $262 million program remains available to the company. The first quarter of 2022 saw continued strong investment and financial performance for the company, and we believe BXSL is well positioned in the current rising rate environment with floating rate assets and largely fixed low-cost liabilities that should allow for enhanced earnings power going forward. And with that, I'll ask the operator to open the call for questions.
spk06: Shondor, before we move to Q&A, I'd just like to clarify that the earnings per share upside from LIBOR that we discussed is on a quarterly basis, not annual. And with that, Shondor, can you please open the call to questions?
spk05: Certainly. Just a kind reminder, if you would like to ask a question, please press star 1 to be entered into the queue. We kindly request that you ask one question and only one related follow-up. If you would like to ask additional questions, please press star 1 to be re-entered into the queue. And the first question is coming from Aaron Siganovich from Citi. Please go ahead.
spk00: You know, with rising concerns about, you know, potential recession, what's the Blackstone kind of view of recession and what are the types of things you're looking for, you know, that would make you a little bit more conservative in terms of your portfolio construction?
spk07: Sure. Thanks, Aaron. Well, why don't I give you the, you know, top of the house view from our chief strategist, Joe Zeidel. I think if he was here, he would express a little bit more of an optimistic perspective on the runway for the U.S. economy and it expanding over the next 12 months. I think his view is that there are certain tailwinds in the household and corporate sector. And that kind of momentum, those tailwinds should sustain growth despite higher inflation and rising rates. And I think he would say there's Generally, three preconditions that would need to be in place before any recession. One, leading economic indicators have to roll over. They typically lead the business cycle by an average of seven months. And as of the most recent print, they're still rising. Corporate, secondly, corporate profit growth on a year-over-year basis needs to turn negative. We've never had a recession in the modern era without profit growth turning negative. and that business cycle contracts before an economic cycle. And then lastly, just the unemployment rate needs to move higher, and we haven't seen that just yet. My overlay on top of that, Aaron, while I believe all that to be true, I think there is going to be a quality breakdown. I think better companies will have pricing power. They'll be able to pass through inflation or grow through it. I think it's really the smaller companies more commoditized businesses that will begin to be stressed, either because of input costs, supply chain issues, rising rates and what that does to the interest burden. And so I think while we generally have a good, decent tailwinds, we're going to see some things break down. And so that doesn't change kind of our portfolio construction and our view around how to mitigate risk, which is, focus on bigger companies, focus on sectors that we think have more growth in them, so more technology, healthcare, less industrial or commoditized type businesses, and continue to be in the most senior part of the capital structure to help mitigate any risk in the event that something does trip one of these companies up.
spk00: Thanks. That's helpful. The other thing I wanted to talk about was credit spreads. Credit spreads in the liquid markets are starting to widen out a bit. And I know it tends to take a while to kind of get into the private credit market, but I'm just curious to see if you're seeing any notable spread widening or if you're kind of repricing some of your new loans that you're putting into the pipeline.
spk07: Yeah, so you're right. And just to put some numbers to that, since the start of the year, first lien loans in the market are down about two and a half points. Second lien loans are down 4.7 points and high yield markets down 11 points. So the further down the capital structure you go, the more spread widening you're seeing. In the private markets, we've seen spreads stay about the same, maybe a little bit wider. But as you point out, there's typically a little bit of a lag in terms of the public markets impacting the private markets, because there needs to be a little bit more duration to that spread widening versus, you know, just pockets of technical volatility. But I would expect over time that if the public markets stay wide or that the private markets will follow. And so we're definitely keeping an eye on that.
spk11: Thank you. Next.
spk07: The only thing I would add, Aaron, is it just, if I can just add to that, you know, typically when base rates widen, your spreads compress. So the fact that base rates are up 120 some odd basis points since the start of the year, without really any material spread compression in the private markets is quite unusual. So effectively yields have widened quite a bit in both the public and private markets.
spk11: Thanks. Next we have Ken Lee with RBC.
spk05: Please go ahead.
spk10: Hi, good morning, and thanks for taking my question. You highlighted some activity with transactions greater than $1 billion. I wonder if you could just further expand upon your comment, then talk about what you're seeing in the potential rejections pipeline at the upper end of the markets, especially given recent market volatility. Thanks.
spk07: Yeah, so in the larger end of the market, it's actually fairly active. Just to put some numbers to it, in 2019, we've talked about this before. In 2019, I think there was maybe two deals above a billion dollars that got done. Last year, there was 26. And the first kind of four months of this year, we've seen about 15. So the secular shift from the public markets to the private markets has continued. I think the volatility in the public markets has accelerated that a little bit for the start of the year. So, what I would say, Ken, the pipeline is very active. It's one of the most active pipelines we've seen in a long time. Just to give you, put a number to it, we're currently reviewing over 150 different transactions both large and small, we will gravitate to the bigger deals, based on my comments earlier. But the market is definitely becoming much more active.
spk10: Very helpful there. And one follow-up, if I may. In terms of leverage, you're currently at your target, being at the upper end of your leverage range. Wondering, do you see any change over the near term, just given current market backdrop? Thanks.
spk01: Hey, Ken, how you doing? I think we like our target range, and in this environment being around one and a quarter, we feel good about where the company is with the current portfolio and our pipeline. So I would not expect our range or our current target to change.
spk11: Gotcha. Very helpful. Thanks again.
spk04: And next we have Finan Oshi with West Fargo. Please go ahead.
spk09: Hi, guys. It's Jordan on for Fin today. We were looking through some of your new origination this quarter, and maybe you only see, I don't know, maybe a handful of new names. Obviously, you're right on the mark for target leverage, so... there wasn't much need to put community assets on. But I'm just curious how you describe the quarter and whether origination was maybe slower across the platform.
spk07: Yeah, so you hit the nail on the head. We were targeting our investments around our target leverage at 1.25 times. Just on origination, Across our direct lending platform, we invested over $5 billion. So we're actually fairly active in the first quarter and will be again in the second quarter. And BXSL, if it had $3 billion of capital, we would have invested $3 billion of capital. But we do not plan on, you know, taking leverage up much higher. And so we're waiting for more turnover in the portfolio to reinvest those proceeds into our pipeline.
spk09: Okay, great. And so it looks like a lot of these bigger deals are maybe in healthcare and software kind of concentrated in those industries. Are you guys thinking about maybe position sizing and how high you would take those industries as a percentage of the portfolio? Any high-level thoughts on that?
spk07: Yeah. Yeah, listen, we think about risk in a lot of different ways. As you know, we're focused on the top of the capital structure. We want to be diversified geographically. We want to be in different sectors. Our belief is that healthcare and technology have become such big parts of the U.S. economy that and our growth sectors and fit very thematically with our view of the world, that those will be kind of on the higher end of our versus other sectors, but we'll maintain a very diversified point of view on how we build up the portfolio across individual assets, individual sectors, and across areas across the U.S.
spk11: All right, thank you, that's all for me. Melissa Weddell with JP Morgan is next in the queue.
spk04: Please go ahead.
spk03: Good morning. Thanks for taking my questions today. I wanted to follow up on something you just said about normally you'd observe that when base rates increase, breast would compress a bit, but we haven't quite seen that yet. I was hoping you could elaborate on that. What is the normal time horizon that you'd expect to see spreads compress after base rates rise, and is there any reason to think this environment might be different?
spk07: Sure. So, I missed the first part of that question, but it was just around, I think, rates and how base rates interchange with spreads. One of the things that we benefit from, and not just us but others, is in order for spreads to compress, there needs to be turnover in the portfolio. We don't voluntarily, you know, take our spreads down on our assets. So, in an environment, and I'll get to your broader question, but I wanted to kind of highlight this one point. In an environment where there is low turnover, there is no spread compression. An environment where there's high turnover, there's higher prepayment fees, there's more income generated from that offset by your spreads coming down a little bit. So, in fact, if spreads compress, you actually, you'll see your portfolio generate more income in that environment. So we feel like we have you know, a lot of kind of positive kind of uplift in either scenario with rising rates or turnover in the portfolio. In terms of your question around will base rates and spreads play out differently this time around, I think it's hard to say. I definitely think there's a lag. In order for spreads to compress, you know, part of the things and this was talked about at the start of the call, you look at as the public markets and what's happening there, and you're, in fact, you're seeing the opposite play out right now. Spreads are widening in that market, and that should have the same impact in the private markets. So in the nearer term, you may see actually spread widening as opposed to spread tightening. That'll level out over time as base rates continue to increase.
spk11: Okay, thank you.
spk05: The next question is coming from Ryan Lynch with KBW. Please go ahead.
spk08: Hey, good morning. I wanted to follow up on something you said in your prepared comments. You kind of talked about the two tailwinds for being rising rates in your portfolio, which obviously there's a lot of interest rate sensitivity there. and also the potential for increasing prepayments. It seems like those are kind of counterbalances to each other and probably are not going to occur in the same environment. I would think obviously rates have been rising like that has already happened in the environment, but it feels like if rates are rising, it seems like in that environment you're going to have a continual slowdown in prepayment fees as people are not going to want to try to refinance into a higher-rate environment. So I would just love some clarity on that. I know your prepayments and repayments were extremely low in Q1, so I'm just not sure if maybe you're just saying coming off that extremely low base, you expect it to rise or if there was something else, but it just seems like a higher-rate environment would also create lower prepayments. So I'd love some clarification on that.
spk07: Yeah, what I would say, thanks, Ryan, what I would say about that, I don't think it's turnover and prepayment are not driven by opportunistic refinancing. That is a very low percentage of what causes prepayments. What causes prepayments is an M&A environment that's fairly active, so companies being sold And we went through a period towards the end of last year, started this year, where a lot of M&A processes were put on hold. It started because of Omicron and then the war in Ukraine created a lot of volatility. Volatility creates a very large bid-ask between buyers and sellers. We're seeing that start to change. And BXSL, in particular, has a vintage that result in more companies starting to look for exit opportunities so they can get capital back to their investors. So I think what you will see, just given our vintage at least, you'll expect to see prepayments pick up towards the end of the year as that M&A environment starts to pick up, which we are definitively seeing right now.
spk01: And then maybe just to add to that, Ryan, you know, base rates, right? This is a floating rate product. So differently, you know, different than mortgages where rates rising means, you know, you have to rebuy at a higher rate. Really, borrowers here are more spread sensitive than rate sensitive because it's all floating rate. So it tends to be the dynamic spreads laying out rather than base rate sensitivity.
spk07: And maybe just one other point. And even if we had no prepayment, like zero prepayment income, right? we'd still cover our dividend by 105%. So our model doesn't revolve around needing that prepayment income to drive origination fees or prepayment fees in order to cover our dividend. We generate sufficient coverage just through our core net income. And that core net income is going to increase because of how levered BXSL is to rising rates, given its asset liability matching or mismatching in this case.
spk08: Yeah, yeah, totally makes sense. Yeah, the rising rates are definitely the clear benefit to you all earnings. And I appreciate the commentary and the clarification on kind of what can drive portfolio activity repayments. The other question I had, you guys have clearly focused on building this BDC with a very high quality portfolio, strong secular businesses. My question is, you know, if we run into a more choppy economic environment or even a recession scenario, you know, I think your businesses are probably going to hold up better than the average BDC. But one of my questions is right now what we're seeing is a big kind of re-rating and revaluation of public market businesses. Even the strongest businesses are re-rating pretty significantly. I'm sure that probably hasn't trickled through to the private markets fully. Maybe it started to get in there yet. My question for you is, what would happen, or I guess, do you expect any significant pullback in private market valuations, similar to some levels we've seen in the public markets, which is well over 20%, 30%, 40% in certain businesses? Again, strong, stable, secular growing businesses in the public markets. And if there would be a valuation pullback, what would that mean to, do you think, credit quality in your book?
spk07: Yeah. So you are absolutely right in the sense that growth businesses have been re-rated and businesses that maybe were trading around 35 times cash flow are maybe trading around 25 times or 20 times cash flow. That definitively will impact valuations in the private markets well for these high quality high growth businesses because remember it's a little bit of they're more exposed to kind of duration risk and in in the risk-free rate so that's driving some of that as well as just capital moving more towards risk off but if we were at 43% kind of loan to value on our investments and there's a a pullback in a re-rating, maybe we're now kind of 55% loan-to-value. So it's why we kind of highlight and talk about where we are in the capital structure on all these calls, not just being first lean, but from an LTV standpoint, kind of where we sit. So they'll definitely, as you re-rate, that cushion will get impacted a little bit but we have so much cushion beneath us that we feel fairly well covered. So we do not worry about that in this environment. What I worry about more generally is that you are seeing a risk off trade and lower quality businesses are feeling more of the impact in their portfolios. They're feeling it from a re-rating standpoint. you know, 13 times, but they should have always been an eight times business and they were levered five or six times, those businesses are going to really feel the impact from what you just described because they're also going to see margin compression given kind of the inflationary impact on their business models.
spk08: Okay. That's helpful. I appreciate the time today and dialogue. Thanks.
spk07: Hey, Ryan, I just want to give you one other stat, which wasn't isn't directly tied to your question, but I think is helpful. And no one's asked this yet, but we think about risk in our primary kind of focus versus any of the kind of drivers that people often focus on. But as you think about rising rates, it clearly has an impact on the cash flow of our businesses. It's good for investors. They get more yield, but that yield doesn't come out of thin air. The portfolio companies have to pay that. And if you look at our portfolio today, about 5% of our issuers have interest coverage below one time. All of those are our reoccurring revenue loans. We have three reoccurring revenue loans, Medallia, Relativity, DreamBox. And so our overall interest coverage is closer to three times. But if interest rates move to – if the base rate moves to 4%, that 5% number becomes relatively uncheat. Once you get to 5%, then base rates in our – if there's a slight uptick to about 13% of our portfolio companies have interest coverage below one time. Maybe that stat helps a little bit to answer your question in the sense that because of our loan-to-value, because of where we sit in the capital structure, the types of businesses that we're focused on, how they're more cash flow generative, in a rising rate environment, we don't think, even if they get to 5%, that our portfolio would be under a lot of distress.
spk08: Yeah, that's helpful. I mean, yeah, there's a Those are good statistics. Low loan-to-values, you know, fairly high interest coverage, as long as it sounds like the business is continuing to execute fairly well because of those starting points are so high, you know, you guys should overall be relatively, I think, fine.
spk11: So I appreciate those additional details. Thanks, Ryan.
spk05: Next, we have Robert Dodd with Raymond James.
spk02: Please go ahead. Hi, guys. One housekeeping one, if I can real quick. First, on the dividend income, is that sustainable? Was it one time? Was it to do with Mermaid or Datasite or anything like that? Or is it just a structural change and we should expect to see that going forward?
spk01: Hey, Robert. The dividend income was really from one investment, one equity investment we have in Mode. So I wouldn't say it's something that we expect to be regular. It was a very high percentage dividend given the size of our equity investment in that company. But I wouldn't say it's something regular or that would predict on a more routine basis.
spk02: Got it. Understood. Thank you. On the other one, since I've got... I'm getting incrementally more pessimistic about the economy. Not doom and gloom yet, but Obviously, your balance sheet looks in great shape for the assets on the books right now with nearly 60% unsecured. If I step back, when we look at COVID, there were a lot of liquidity draws for a lot of BDCs. You've got $700 in available cash and borrowing capacity. but undrawn commitments of north of a billion. Can you give us any color on of that, the undrawn commitment? How much is actually drawable? A lot of it's delayed draw terms, obviously, so probably not drawable. And even the revolvers, how much of that? How much of the unfunded commitments are actually drawable, say, today at will by a borrowing company?
spk01: The vast majority are DDTLs, as you mentioned, Robert, and over our experience with DDTLs is over their life, maybe 30% to 40% of them get drawn ever during the overall life of a DDTL. So the revolvers represent a small portion of that unfunded commitment. So our view is... between prepayment activity and really probably moderate, you know, deployment or drawing on those unfunded commitments that were well covered. But that is a topic we obviously keep very front of mind and, you know, look to balance that out in this quarter as well.
spk07: And, Robert, the other thing I would say, too, is, you know, just to add to that, Remember, we have 60% of our liabilities in unsecured debt. So we have $10 billion of assets. Only, what, 2.3-ish of that is in secured facilities. So our ability to take on additional liquidity if we need to is we're very well positioned for that. But Steve's right. You know, our experience with these DDTLs are attached to M&A. We do get a lot of visibility into when that M&A is going to happen. It's really the revolvers you worry more about because revolvers get drawn when bad things are happening versus delay draws get drawn when good things are happening. So it's a little bit of a, I think, from a positioning standpoint, we feel better about.
spk02: Understood, and partly it was a fishing expedition. You have a lot of unpledged assets, effectively. you could upsize the revolver. I mean, has that been considered?
spk11: Yes, it's actively considered. Thank you.
spk04: And our final question comes from Casey Alexander with CompassPoint.
spk05: Please go ahead.
spk13: Yeah, good morning. I'm just wondering from sort of a functional operating standpoint, Now that the share repurchase program has been activated, should we be thinking about as the share repurchase program executes that the total portfolio balance would actually run down a little bit in order to fund the share repurchase program? Or should we be thinking about it as allowing the share repurchase program to lift the leverage ratio somewhat?
spk01: I think it's a little bit of a balance of both, Casey. I think it also is a little bit path dependent on how active the repurchase program continues to be. You know, it is formulaic and buys shares. It's allowed to buy shares a percentage of our previous trading day's total volume, which isn't an enormous amount. So it's fairly slow moving and constant when we're trading below NAV. But I would say It could result in a little bit increase in leverage. As you've heard us say, we like where we are. So if we have some prepayments and the repurchase program is continuing, we would probably try to maintain leverage. At the same time, if we don't have prepayments and the repurchase program is operating pretty modestly, we'd probably stay where we are as well.
spk13: Does the repurchase program have a termination date?
spk11: Yes, it is November of this year. Okay. All right, thank you. I appreciate you taking my questions.
spk04: Now I would like to turn the call back to Michael Needham for closing remarks.
spk06: Great. Thank you, Shandor, and thank you, everyone, for joining our call today. Our IR team is available for any follow-up questions. Have a great day.
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