Blackstone Secured Lending Fund

Good day and welcome to the Blackstone Secured Lending First Quarter 2023 Investor Call. Today's conference is being recorded. If you require assistance at any time, please press star zero. All participants are in listen-only mode. We will conduct a question and answer session after our prepared remarks. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. At this time, I'd like to turn the conference over to Weston Tucker, head of Blackstone Shareholder Relations. Please go ahead.

Great. Thank you, Katie. And good morning and welcome to Blackstone Secured Lending's first quarter call. Earlier today, we issued a press release with a presentation of our results and filed our 10-Q, both of which are available on the shareholder section of our website, www.bxsl.com. We will be referring to that presentation throughout today's call. I'd like to remind you that this 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 factor section of our most recent Form 10-K. This audio cast is copyrighted material of Blackstone and may not be duplicated without our consent. With that, I'll turn the call over to BXSL's Co-Chief Executive Officer, Brad Marshall.

Thank you, Weston, and good morning, everyone. With me today is John Bach, Co-Chief Executive Officer, and we are excited to be joined by Teddy DeLose, our newly appointed Chief Financial Officer, effective as of close of business today. Many of you know Teddy as he has been with Blackstone Credit since 2015, first on the direct lending investing team, and then in a portfolio manager capacity for our direct lending business. We're excited to have him officially join BXSL's management team. Turning to this morning's agenda, I'd like to start with some high-level perspective before John and Teddy go into the detail of our portfolio and first quarter results. Turning to slide four, BXSL's reported another strong quarter with significant growth in net investment income, higher net asset value, and strong credit performance, all in a period that was marked by meaningful uncertainty ranging from commercial bank failures to stubbornly high core inflation. Net investment income, or NAI, increased 3% quarter over quarter to 93 cents per share, which represented a 14% annualized return on equity and our highest NAI per quarter since inception. Primarily driven by rising interest rates, that have increased the average yield on our debt investments from 10.7% last quarter to 11.4% at quarter end. This earning power further reflects the quality and strength of our well-sourced portfolio, which as of March 31st was 98% senior secured first lien, 45.2% loan to value. Using cost basis to measure, less than 0.14% of the investments are in non-accrual, or 0.07% on a fair market value basis, and less than 2% of our assets are marked below 90 at cost. Our net asset value per share, which increased 0.7% to $26.10 from $25.93 the previous quarter, further reflects portfolio stability. Earnings power again exceeded our quarterly dividend of $0.70 per share, which was increased 17% last quarter and has increased over 30% since the fund's IPO in late 2021. Our current dividend represents a 10.7% annualized yield for shareholders based on the higher first quarter NAV of $26.10 per share. We believe this represents the highest dividend yield for any listed BDC with as much of its portfolio invested in first lien senior secured assets. Slide five provides additional highlights on our portfolio activity and stability in our liquidity position. First quarter sales and repayments were $109 million, matched by $108 million in new investment commitments. The result of lower net origination was tied to both a seasonally slow period for new deal activity as well as a lower overall level of deal volume as private equity sponsors selectively adjust to the new market and rate dynamics. That said, we are beginning to see more market activity, which may lead to an increase in portfolio turnover. Subsequent to quarter end, we realize our debt and equity investments in Westland, the impact of which we expect to be accretive to NAI by more than $0.05 per share. In terms of our balance sheet, we also believe we remain well positioned for both defense and continued growth with $1.2 billion of liquidity from cash and our undrawn lending lines. Our lending lines were set up two years ago at what are now below market prices with high-quality counterparties. We had zero direct exposure to Silicon Valley Bank, Signature Bank, and First Republic Bank. and we have less than 1% of all secure debt commitments from regional banks in general. Turning to slide six, we ended the quarter with $9.6 billion of investments and leverage of 1.31 times, which is down from 1.34 times the previous quarter. Importantly, the ending yield of our portfolio, which is 98% floating rate, expanded over 400 basis points over the last 12 months. Taking a moment on this slide, I want to outline that each quarter the market continues to witness increased earnings power associated with floating rate nature of our loans and the attractive fixed rate liabilities. However, I believe that there is a growing demand for BXSL due to its defensive positioning during these more volatile times. In fact, if you look at senior secured debt, which is 98% of BXSL's portfolio composition, the private credit asset class, as measured by Cliffwater Direct Lending Index, has generated consistent returns, ranking as the top first or second performer in fixed income in 13 out of the past 18 years since Blackstone, then GSO, launched its private credit strategy in only one down year, which was during the great financial crisis. And prior to the GFC, the average loan-to-value was 66% versus 57% in 2022 and 45% in PXSL. Part of the focus on limiting risk in our portfolio is to focus on larger deals. Our leadership in large private credit transactions, where we have led or been the sole lender in approximately 50% of the 1 billion plus direct lending deals, is important as we have control over the outcome in these deals. That focus on building right, lending to the right businesses, which some may consider to be a first line of defense, continues to generate solid returns for BXSL shareholders. Comparing our NAV returns to public market benchmarks, BXSL generated a total return of 3.4% in the quarter, compared to 3.2% for leveraged loans, 3.6% for high yield bonds, and 3% for investment grade bonds. John will speak more to the portfolio later in the call. Additionally, there's a second line of defense to protect capital. Often just as important as the first, but goes less recognized by investors. That is the potential value add a manager can bring to the portfolio after investments are made. Many of you have heard us outline the benefits of Blackstone Credit Value Team, formerly Blackstone Credit Advantage, but I'd like to put a few numbers behind this value add. Recall we have an internal Blackstone team of 109 professionals who work with our portfolio companies, including over 20 professionals in Blackstone Credit. This team offers the scale and operating capabilities of the Blackstone network to our portfolio companies that drive both revenue and cost synergies to the benefit of the portfolio company and the private equity sponsor. We believe these benefits are unique to Blackstone Credit, and they provide substantial value to our shareholders. Let me share some detail with two examples where we held the equity. Last summer, we realized our position in a company called DataSites, a leading provider of virtual data room, or VDR, services in which BXSL had invested in equity and warrants alongside the debt commitment, which was never called. Recall, VDRs are independent platforms used to host and share highly confidential files and manage workflows. By leveraging the Blackstone value creation team, and the broader Blackstone network, we were able to identify and help DataCite execute on meaningful cross-sell opportunities and cost savings. One important element to assist DataCite was Blackstone's over 93 introductions across the Blackstone ecosystem, including Blackstone's internal teams, the Blackstone portfolio companies, advisors, and private equity partners. Subsequent to quarter end, as I mentioned earlier, We realized our investment in Westland, a Canadian insurance brokerage business, and its sale to Broad Street Partners. We first invested in Westland in 2021 and have provided a combination of debt and equity-based growth capital that helped turn them from a regional broker into a national-scale player with nearly twice the operating profits. With the help of our advisor expertise, we provided support on their IT transformation to support growth culminating in a payoff that we expect to be accretive to NAI by more than $0.05 a share. Across these two investments, VXSL invested $207 million and received $265 million in proceeds on the sales, a 28% increase on our initial investment in addition to the $28 million of interest we received during our hold period. Remember, we offer cross-sell, cost-saving, and advisory opportunities to all of our boards at no additional fee because we understand the end benefit to the investment portfolio. And while we are a lender first with a portfolio overwhelmingly invested in first lien senior secured loans, our operating platform allows us to realize additional equity upsides or help de-risk our debt investments. Datasite and Westland are two very recent and successful case studies of how truly unique our platform and our capital can be for the companies that we partner with. Generally, across our direct lending business, a substantial majority of the portfolio companies that are introduced to the valuation creation team actively participate in the program. And while we have a large portfolio monitoring team that is one of the largest in the world in private credit, we go beyond that. with our own resources and infrastructure to drive outcomes. That benefit not only our portfolio companies, but also our shareholders in real, tangible ways. With that, I'll turn it over to John to speak about the portfolio.

Thank you, Brad. And echoing your comments on strength in periods of uncertainty, let's again see what a defensive portfolio looks like. So jump to slide seven. Let's start with seniority. Roughly 98% of BXSL investments are in first lien to new secured loans, and over 95% of those are to companies owned by private equity firms or other financial sponsors who have access to additional equity capital to support their companies. The portfolio is highly equitized, with an average loan-to-value of 45%. But it's not just that we're senior in the capital structure. More importantly, we're focused on seniority with companies of the right size, and in the right industries. Focusing on size, our portfolio companies have a weighted average EBITDA of $179 million, relative to $128 million as of the first quarter of 2022, as we continue to orient the portfolio to larger, more durable businesses. I'll jump to slide eight. Our focus on the upper end of the middle market is rooted in our belief that this area provides compelling value opportunity, and the data bears this out. Note that recent data from Lincoln suggests that upper middle market companies with greater than $100 million of EBITDA maintain a similar credit spread per unit of leverage compared to middle market businesses, but larger companies grew more than twice the rate of smaller companies in 2022 and have had substantially lower default rates since 2018. And for reference, BXSL had less than 2% of its portfolios. in companies earning less than $30 million of EBITDA, which have historically had those higher covenant default rates. Now, many of you know Lincoln as a leading valuation provider to private credit in the BDC space, as they value and review over 4,000 private credit investments each quarter. Now, slide nine focuses on our industry exposure, where we believe investing in better companies and better neighborhoods drives sustained returns over time. This means focusing on key sectors with low default rates, low CapEx requirements, such as software, healthcare providers and services, and professional services, which account for over 35% of the investment portfolio. Now diving into the portfolio quality further, jump to slide 10. Here we compare the BXSL portfolio to the Lincoln International Private Markets Database. And you can see that our weighted average EBITDA of $179 million is more than double the market average of $80 million. Last 12 months EBITDA growth for our portfolio companies was nearly triple that of the benchmark. And importantly, on profitability, our portfolio companies have EBITDA margins that are 25% higher. Now let's talk interest coverage. As mentioned last quarter, this is a stat that gets widely shared on other listed BDC earnings calls, But as we've mentioned previously, the way it's calculated by BDC managers varies widely. In some cases, certain sectors or types of loans are excluded. In other cases, managers exclude negative EBITDA companies, both decisions that obscure the averages and leave investors looking for better transparency. So when we calculate interest coverage, we include all private companies' EBITDA, including companies that have borrowed on a recurring revenue loan and companies that may have amended some of their interest obligations to pick after initial underwriting. Next, we compare our portfolio to the Lincoln database, which we believe is a representative proxy for that entire credit market. Now, we currently sit at a last 12 months average interest coverage of 2.1 times today, which is slightly higher than the market average of 1.8 via Lincoln. This difference, remains resilient when we run interest rates at 5% through the portfolio, which brings our average interest coverage to 1.7 times compared to the market at 1.4. And we attribute this stability to our focus on larger, more profitable, higher growth businesses. Yet, we also hear from investors and other market participants that it's less about averages, particularly the averages that are obscured by exclusions, and much more about the tails. namely the percent of one's portfolio below an interest coverage ratio of one times on a forward basis using higher base rates. If we flow through 5% interest rates, reflecting the lower end of the Fed funds target range today, we can see that BXSL would have had roughly 7% of its portfolio with an ICR below one, compared to the private credit database or market, which is approximately twice that amount. And in the 5% interest rates example, of that estimated 7% of our portfolio below 1% or 1 times interest coverage, 3% is related to a single transaction that we initially structured with a low ICR, given the anticipated ramp of EBITDA generation. That company continues to perform and expand its profit margins. So discerning investors will be right. Averages will not tell the story of direct lending performance. The tails will. And we seek to limit our tail risk with a focus on larger, better businesses and more stable sectors. And we continue to see favorable results. Blackstone still is conservative credit culture on a foundation of structural protections for investor capital. And we do this always while focusing on larger transactions. Note that when Blackstone leads or co-leads the vast majority of our deals, they have structural protections against asset stripping, collateral lease, to prevent any shifting of assets out of our collateral package, and almost none allow for uncapped EBITDA add-backs, all materially better than when compared to the leveraged loan market. Now, let's just turn to amendments for a moment. We work with our companies constructively in the regular course to provide an idea of scope. And so of the 45 amendment requests that we've received this quarter, 98% were related to M&A, add-on activity, and other benign technical amendments, such as SOFR, rate hedging, or reporting. We did not have any situations where we provided immediate PIC flexibility due to the inability to pay interest or principal. Now turn to slide seven, slide 11, sorry about that. As Brad mentioned, we increased our dividend distribution to 70 cents a share with the current dividend yield at NAV of approximately 10.7%, and that was up 17% from the last quarter and has increased over 30%, to be clear, last quarter, two quarters ago, relative to the fund's IPO in late 2021. So importantly, we believe this 10.7% dividend yield at NAV is supported by a high margin of safety when you compare it to BXSL's net income yield of 14%. And it further reflects our view that the best dividend policy can support both a steady and stable distribution and long-term NAV growth. And with that, I'll turn it over to Ted.

Thanks, John. And thanks for the introduction, Brad. I'm excited to be part of the management team and look forward to spending more time with folks here on the phone in the coming months. I will spend a few minutes on our operating results, summarize our investment activity, and give some color into the pipeline activity we see on the ground today. I'll start with our operating results on slide 12. In the first quarter of 2023, we generated our highest quarterly net investment income to date of $149 million. or $0.93 per share, which was up 45% year-over-year as we continued to see the benefit of higher base rates flow through earnings on a predominantly floating rate first lien portfolio. Our net investment income yield in the quarter was 14%. Total investment income was up $79 million, or approximately 43% year-over-year, to $265 million in the first quarter. Importantly, we maintain a policy by which no origination fees are paid to the manager mitigating conflicts associated with originating any particular transaction. In addition, a hundred percent of upfront origination fees are amortized over the life of our loan. This results in a more stable income picture versus recognizing fees upfront, particularly in an environment where origination and repayment activity is lower. To that end, fee income was less than $1 million in the first quarter due to below average repayment volume of $109 million, yet we still generated earnings that represented 133% coverage to our dividend. Payment in kind or PIC income was about flat quarter over quarter and represented less than 4% of total investment income. As John mentioned, we are encouraged by our borrower's ability thus far to manage through higher financing costs at higher base rates, and we had no new amendments in the quarter providing for PIC flexibility. Moving down the P&L, net expenses were up 33 million compared to last year's first quarter, driven primarily by higher interest expense. GAAP net income in the quarter was 139 million, or 86 cents per share, up from 63 cents per share a year ago. Unrealized markdowns of approximately 15 million in the quarter were the primary driver of a $2 million capital gains incentive fee reversal, or approximately $0.01 per share benefit to net investment income. Turning to the balance sheet on slide 13. We ended the first quarter with $9.6 billion of total portfolio investments, of which approximately 98% are floating rate loans with a weighted average yield of 11.4%. This compares to $5.5 billion of outstanding debt with a weighted average cost of just 4.68%. The spread between our floating rate assets and low-cost, mostly fixed rate liabilities has helped offset the impact of rising rates on our average cost of debt. As Brad previously mentioned, sales and repayment volume of $109 million was matched by new investment activity of $108 million. 90% of which was related to portfolio activity where we have incumbency. To give some context for the pipeline, we have seen an increasing activity in recent weeks, both as it relates to new opportunities and portfolio activity where we retain incumbency, which represents a significant competitive advantage from our scale and presence in the market. We believe this represents a strong foundation for new originations for BXSL to the extent capacity increases from repayment volume or new share issuance. Lastly, as a result of strong earnings in excess of the dividend in the first quarter, NAV per share increased to $26.10, up from $25.93 last quarter. Next, slide 14 outlines our attractive and diverse liability profile. which includes 58% of drawn debt in unsecured bonds and an average fixed rate of less than 3%, which we view as having been a key advantage while the Fed increased its policy rate by 500 basis points since the beginning of 2022. Additionally, BXSL ended the quarter with $1.2 billion of liquidity and cash and immediately available but undrawn secured leverage capacity. Our debt-to-equity ratio was 1.31 times, down from 1.34 times last quarter. Additional repayments realized subsequent to quarter end will help support deleveraging towards our target of approximately 1.25 times. Importantly, we ended the quarter with a 0.14% non-accrual rate at cost versus the BDC market average of 2.2% as of March 31st. We maintain our three investment-grade corporate credit ratings. Additionally, we have a low level of near-term debt maturities with just 6% of commitments maturing within the next two years and an overall weighted average maturity of 3.6 years. To that end, in March, we amended our $500 million Big Sky facility with Bank of America, which further expanded our revolving period by two years with no pricing step-up until September 2024. Importantly, BXSL's model is very different from some of the regional banks that have had issues. We do not hold deposits. We run a little over one turn of leverage, while banks typically run above 10 turns of leverage. We do not hold fixed-rate liquid assets to cover funding obligations, and we manage the duration of our liabilities to match or exceed the expected duration of our assets. As mentioned, we have available liquidity of $1.2 billion at quarter end, which we believe is sufficient to repay the $400 million bond maturing in July of this year. Should we choose to do so, this will maintain ample pro-forward leverage capacity for unfunded commitments, which at quarter end totaled approximately $600 million, with over 40% expiring by the end of this year if unused. We continue to balance the attractiveness of the market opportunity today, indirect lending, and quality of our pipeline We're focused on managing the balance sheet toward our target of approximately one and a quarter times leverage. We may see additional repayments materialize beyond the approximately $200 million realized subsequent to the end of the first quarter, which would further support deleveraging and capacity for new deployment.

With that, I'll pass it back over to Brad. Thanks, Teddy.

Blackstone has been investing in cycles for over 37 years, and Blackstone Credit and Private Credit for 17 years. Since the very beginning, our investment committee has been working together, navigating through cycles, and we've delivered a 12 basis points annualized realized loss rate in direct lending to our track record as of March 31st. We have 100 specialized industry advisors that support our underwriting, We cover over 3,000 companies across private and liquid credit strategies. And we have 300 investment professionals globally across 17 offices. And what we believe to be one of the largest teams in the industry at 57 in our CIO office specialized in active portfolio management. While we remain highly disciplined in an uncertain macro environment, We believe the dynamics at play create a once-in-a-generation opportunity for direct lending and remain positive about the outlook for BXSL shareholders as a result. And with that, I'll ask the operator to open it up for questions. Thank you.

Thank you. Once again, if you would like to ask a question, please press star 1 on your telephone keypad. We ask you limit yourself to one question and a follow-up to allow everyone an opportunity to ask questions. We'll take our first question from Finian O'Shea with Wells Fargo.

Hi, everyone. Good morning. Question for Brad. I guess for one, is the post-quarter repay you noted in the presentation, is that going syndicated? And then can you touch on the general potential for your portfolio being large, firstly, and well-performing, etc.? ? to flow out into the BSL channel?

Yeah, sure. So to answer your question on the first, on the asset Westland, a corporate is buying that asset. And yes, they are using public debt to fund that acquisition. On your second point around the syndicated markets, I would say that continues to be a market that hasn't fully recovered. But as some of the larger assets outperform and look to lower their cost of capital, there is an opportunity for there to be more turnover in the portfolio, and we would get our call protection on those assets. But as I look across the opportunity sets, and we have about $30 billion of assets in our pipeline right now. So I think the IC turnover is a potential very positive from an earnings standpoint because the pipeline is so large for us that we'll be able to easily replace it.

Okay, great. That's helpful. And then a follow-up. I think Teddy touched on this. I apologize if I didn't hear the full answer. The fee income has been pretty anemic. Can you remind us if any of the fees are retained at the advisor level? And relatedly, would you expect this to eventually pick up for the BDC?

Yeah, I'm happy to take that, Finn. Thanks. No fees are retained at the advisor level to answer your first question. And to answer your second question, I think it somewhat depends on market volumes. As Brad mentioned, we are seeing an increase in activity across our pipeline. That's been the case for the last couple months, and that could lead to more repayment volume, which would drive fee income and accelerated OID as well.

When we do a deal, Finn, that upfront OID gets amortized over the life of the loan, which Teddy highlighted, and I'll be a little more emphatic than Teddy. The manager does not scrape fees for the benefit of the manager. Every fee that we generate goes to investors.

Thanks so much.

Thank you. We'll take our next question from Casey Alexander with CompassPoint.

Hi. Good morning. First off, in past quarters, you've had a chart that discussed that when all resets flowed through the portfolio, what the earnings power might be. Have we pretty much captured all of the resets at this point in time, or is there additional flow through that could punch earnings a little bit higher?

Thanks, Casey. No, so, you know, we just put some numbers to it. Our average base rate earned in the quarter was right around 4.7% across our portfolio. That's versus the three-month LIBOR spot rate at 331 of close to 5.2%. So what we would say is there is still some juice left to see just based on where rates are today. And historically, we have shown that chart. If we run that through our analysis today, that's an extra $0.04 or so of earnings potential just from base rates.

All right, great. Thank you. Secondly, while I appreciate the statistic that only 2% of your portfolio is trading below 90% at cost, Do you know what across the portfolio, what the average discount to par value that the portfolio is priced at right now? I'm just trying to get at how much potential NAV accretion there might be when you start to get repayments on the portfolio.

Our average mark as a percentage of par at the end of the first quarter was 97.8. Great, thank you very much. I appreciate you taking my questions.

We'll take our next question from Ken Lee with RBC.

Hi, thanks for taking my question and good morning. You talk in the prepared remarks about seeing more market activity more recently. I wonder if you could just further expand upon that. Where are you seeing activity coming from and looking a little bit further out for the rest of the year? Granted, incumbency is going to help. How dependent are origination bonds going to be on M&A activity picking up, you think? Thanks.

Yeah. Thanks, Ken. I'll take it. So where we're seeing activity public to private, so public companies looking to be taken private by private equity sponsors. We're seeing add-on financings. We're seeing corporate carve-outs. And we're actually seeing a pickup in sponsor-to-sponsor activity. Anytime you're in a period of volatility, the bid-ask spread is fairly wide. And with the passage of time, that tends to come down. So we're seeing valuations come down and more transactions as a result of that. And for us, the reason why our pipeline is so big is because we have such large incumbency and 3,000 credits Anything that is large will have to come through Blackstone Credit. Anything complicated, such as carve-outs as well. And so I don't think, as we think about investing and continuing to invest out of BXSL, that we're 100% dependent on what the broader market is seeing because kind of our deal funnel is as busy as it is.

Gotcha. Very helpful there. And one follow-up, if I may. You've been out-earning your common dividend meaningfully. Wondering if there's any update thoughts around dividend coverage and how it could trend over the near term. Thanks.

And this is Bach. The way I kind of look at it would be the best BDC valuations are really defined by two things. Steady and stable dividend profile. and a slowly and steady increasing NAV. We've seen that over the decades. And so in terms of our application of approach here, you can see that level of earnings excess. That excess will continue to build and spill over and flow into NAV. And then over time, to the extent we approach a cap, you know, clearly there would be some level of special, but our focus is on maintaining a stable and steady dividend and then watching NAV grow as a result of accretion to NAV through excess earnings.

Got you. Very helpful there. Thanks again.

We'll go next to Robert Dodd with Raymond James.

Hi, guys. A couple of questions. First one, on Westland, can you reconcile a number for me? I think, Brad, you said more than 5% accretive to NII. Looking at the mark, there looks to be about $4.5 million in embedded prepayment fees and fair value in the quarter. So, you know, that would be about two, two and a half cents. So, is there a dividend along with the exit of Westland this quarter? Or can you reconcile the difference between where the mark on the loans are and the embedded prepay fees and your indication of that? And I appreciate it.

Yeah. So, remember, or maybe not remember, but when we did the deal, we gave them both debt and equity. With the debt, we had warrants attached to that debt that increased our discount. So our OID was lower. But we also had a fair bit of call protection. So between the call protection, the accelerated OID, that results in the approximate $0.05 of NAI.

So you didn't mark up the fair value to the known proceeds for this quarter? We didn't mark it out. On the unsecured that's going to mature in July, you can obviously have liquidity taken out. If you just take that up with a revolver, you'll drop unsecured as a percentage mix down to just over 50%, which is perfectly adequate. How low, if Markets remain, you know, BDC unsecured markets remain disrupted for an increasingly long period of time. How low would you be comfortable going on the unsecured mix conceptually? I mean, obviously, the rating agency is like 30 plus, but you're usually well ahead of that.

I'm happy to hit that.

So first, if you look at our maturity profiles, we give the $400 million bond that's maturing. After that, the earliest maturity is a floating rate facility in 2025. So the capital structure is pretty set and rock solid until then. I would say we have the benefit of low-cost financing that was put in place really prior to the dislocation and spread widening that we saw last year. Our average spread on our revolver is SOFR plus 175, and we'll potentially use those proceeds to to pay back the bond. You know, we'll be opportunistic with it, right? When the market opens up and we see a good opportunity, then we certainly could issue bonds. But to your point, we do have quite a bit of cushions starting at 58%.

We want to manage the rating, Robert, as well. So that's our whole goal in everything we do is minimize risk and maximize earnings.

um and and so it'll be whatever we do in 2025 2026 will be consistent with that got it thank you we'll take our next question from ryan lynch with kbw hey good morning uh first question i had was um you know if you look at your your overall portfolio composition maybe your top 10 industries on slide nine I know this is probably tough to do because it's going to depend on each individual's company's performance, but when you look at those top 10 industries, are there any industries that are maybe outperforming your original expectations in this environment? And then conversely, are there any industries that are maybe underperforming in this current environment? I'd love to get your opinion on that.

So 90% of our portfolio is is in line or exceeding their budget, Brian. So that's a pretty high percentage. And I would say the areas that are probably outperforming the most will be software, healthcare, IT, insurance, professional services. Those would be the largest outperformers. But each of those sectors on page nine We expect to continue to be very good performers in a market that could see some headwinds. Maybe to answer the question differently, where I expect to see more challenges across the market, not surprisingly, will be in cyclicals, will be in heavy industrial businesses, will be in retail, will be in low margin businesses. Those sectors will arguably feel the full impact of rising rates and higher inflation, as well as a slowing economy. We were very, very deliberate when we set out VXSL to be in sectors that we thought could grow through economic cycles, and the portfolio was built accordingly. You notice that we don't have a lot of tech that's in these earlier stage negative sectors, EBTA-type profile that some managers have gotten into, those could face challenges if they can't access the capital markets or they don't cut costs. Our software businesses are larger, EBTA-positive, and are growing at 14% year over year.

What about your healthcare businesses? We've heard from other industry participants that the sector that you know, is facing some pressure, particularly with wage growth and keeping up with those costs. How is that sector overall performing relative to your expectations thus far? And what's your expectation for?

Yeah, the areas you've seen issues, and we've seen others add some assets to non-accrual, have been more of these doctor practice offices, which were very reliant on acquisitions and roll-ups to mask their lack of cash flow generation. So as acquisitions have slowed down, as that kind of adjustment to the cash flow has ended, you're seeing a lot of pressure in those businesses. And you're right. You've got wage pressure from nurses, technicians that are up 50-plus percent, and those businesses have not been able to pass on those price increases to the consumer or the end user. And so our exposure to those types of businesses is very, very low. We have one business that's actually on our assets that are marked below 90 called WHCG Purchaser. It's called Axia. and that is, you know, unperforming plan, and we're watching it closely, but that's really the only one across the entire portfolio.

Okay. I appreciate you taking my questions today.

Thanks, Ryan. We'll take our last question from Melissa. What else? With JP Morgan.

Good morning. Thanks for taking my questions today. First, just wanted to say congrats. to Teddy and Stacey and the rest of the NAME team today. I look forward to working with you. I think a lot of my questions have been asked already and answered, but I was hoping to get your thoughts on sort of the implications of the forward rate curve. Certainly looking at over the next 18 months, a couple hundred basis points decline in forward rates. You've talked about stressing portfolio investments for 5% sustainable rates. But what do you think about what the forward curve is implying in terms of declines and what might you expect to see in terms of spread trends in that kind of environment? Thanks so much.

Yeah. So the forward curve is clearly reflecting a view that inflation is a little bit more under control and we may be entering, you know, slower, Economic period, by the way, higher rates are designed to do that. So it's not a surprise. And and so on the one hand, that's positive for the portfolio companies that will help them retain more cash on the business versus paying us. On the other hand, you may see a slower economic environment. It's certainly an environment that we've been planning for. So from our portfolio standpoint, you know, I think we're we're we're in very good shape to head into a slower economic period. As it relates to spreads, I think spreads feel like they've topped out. We are starting to see some spread compression, which, by the way, will be good for existing marks on assets over time. And I think what's driving that in this sort of environment, what tends to happen is in a slower M&A environment, the higher quality businesses tend to come to market first. And you would expect those type of businesses to have tighter spreads than other businesses. And so you're seeing a quality bias in the market right now, and that's driving spreads a little bit tighter than where we were over the past couple of quarters.

Thanks so much. Thanks Melissa.

That will conclude our question and answer session. At this time I'd like to turn the call back over to Mr. Tucker for any additional or closing remarks.

Great, thanks everyone for joining us today and the team is available after the call for any follow-up questions. Have a good day.

That will conclude today's call. We appreciate your participation.