Blue Owl Capital Corporation

Good morning, everyone, and welcome to Blue Owl Capital Corporation's first quarter 2025 earnings call. As a reminder, this call is being recorded. At this time, I'd like to turn the call over to Mike Masticcio, head of BDC Investor Relations.

Thank you, operator, and welcome to Blue Owl Capital Corporation's first quarter 2025 earnings conference call. Yesterday, Blue Owl Capital Corporation issued its earnings release and posted an earnings presentation for the first quarter ended March 31 2025. These should be reviewed in connection with the company's 10q filed yesterday with the SEC. All materials referenced on today's call, including the earnings press release, earnings presentation and 10q are available on the investor section of the company's website at Blue Owl Capital Corporation.com. Joining us on the call today are Craig Packer, Chief Executive Officer, Logan Nicholson, President, and Jonathan Lamb, Chief Financial Officer. I'd like to remind listeners that remarks made during today's call may contain forward looking statements, which are not guarantees of future performance or results, and involve a number of risks and uncertainties that are outside of the company's control. Actual results may differ materially from those and forward looking statements as a result of a number of factors, including those described in BDC's filings with the SEC. The company assumes no obligation to update any forward looking statements. Certain information discussed on this call and in the company's earnings materials, including information related to portfolio companies was derived from third party sources and has not been independently identified. The company makes no such representations or warranties for respect to this information. With that, I'll turn the call over to Craig.

Thanks, Mike. Good morning, everyone, and thank you all for joining us today. We delivered solid first quarter results driven by the ongoing strong performance of our portfolio. As a reminder, we completed the merger between OBD's and our view positions as well to weather potential future volatility or recession. Majority of our portfolio companies are backed by private equity sponsors, who are skilled operators with significant equity investments in these businesses. We have a strong portfolio of companies that This is particularly important during more volatile times, as these sponsors have substantial financial resources, including ample dry powder to support their investments for extended periods of stress, as we saw during COVID. Additionally, we are a lead or co-lead lender on roughly 90% of deals and administrative agent on approximately 65% of our investments across our platform, which gives us direct access to real-time information on borrower performance. To date, we have not seen any material signs of stress, such as increased revolver borrowings, requests for interest payment modifications, or late interest payments. We also benefit from a strong balance sheet and significant liquidity, supported by diversified and flexible funding sources to allow us to be resilient and invest across all market environments. In summary, we believe our experienced team, defensively constructed portfolio, disciplined underwriting, and highly durable funding model have positioned us to protect our shareholders, regardless of what lies ahead. With that, I'll turn it over to Logan for additional color on portfolio performance.

Thanks, Greg. As just mentioned, the recent policy shifts subsequent to quarter end only added to the uncertainty about when a pickup and M&A activity will materialize. Accordingly, originations were lighter this quarter. We recorded $1.2 billion of new investment commitments and $800 million of fundings, excluding joint venture and strategic equity activity. Over 90% of first quarter direct loan originations consisted of first lien investments, as we continue to believe that first lien and unitronch loans provide the most attractive relative value in the current market. As a result, over the last year, OBDC's first lien investments have grown from 73% to 77% of the portfolio. While activity has slowed, we continue to find large high quality opportunities during the quarter, including PCI Pharma, a $4.5 billion transaction led by Blue Owl to refinance a syndicated loan. Notably, with an average deal size of approximately $2 billion this quarter, we continue to see the market migrate towards larger more diversified credits. With the addition of first quarter originations, the median EBITDA of our portfolio borrowers grew slightly to $120 million and weighted average EBITDA increased to $215 million. Portfolio company revenues and EBITDA once again increased in the mid to high single digits year over year. We would highlight this is approximately double the US GDP growth rate due to our durable non-cyclical sector selection, which should provide our borrowers more cushion in a potential recession. The portfolio also remains highly diversified with an average investment size of approximately 40 basis points. And our top 10 investments represent approximately 22% of the portfolio, down from 24% in the prior quarter. Additionally, as Craig noted, our average LTV is just over 40%, which provides significant support underneath our capital. Now I'd like to touch on some credit metrics in our portfolio. The non-accrual rate as a quarter end was .8% at fair value and .4% at cost, compared to .4% and .9% in the prior quarter. The change reflects two additions, including national dentists labs, and the removal of three positions that were fully exited. Stepping back, our accrual rate remains at the lower end of our broader sector averages. Next, our internal rating system, which ranges from one to five is an indicator of portfolio health, remains steady, and the subset of names on our watch list is also stable quarter over quarter. Interest coverage remains steady at 1.8 times based on current spot rates, up from trough levels, as lower rates have benefited our borrowers, which should provide them a bit more flexibility during this period of uncertainty. Finally, pick income declined to .7% of total investment income from .2% last quarter, driven by several investments that were awarded to all cash pay, as well as the merger with OBDE, which had lower levels of pick exposure. As we've highlighted in the past, the vast majority of this pick was underwritten at inception, rather than as a result of credit issues. And these investments continue to perform as expected. In closing, I want to echo the sentiment Craig shared. Our first quarter results demonstrate the continued strength of our portfolio. We are closely monitoring our investments for potential tariff impacts, but we remain confident in our defensive positioning and proactive in our approach. And now I'll turn over the call to Jonathan to provide more detail on our first quarter financial results. Thank you,

Logan. Before discussing our financial results, I want to review the non-GAAP accounting adjustments we introduced this quarter due to the accounting treatment of our recent merger with OBDE. We did this to help make our post merger financials more comparable to pre-merger results. Under the asset acquisition method, we recognized an $83 million purchase discount on the assets acquired from OBDE, which resulted in a one-time unrealized gain to OBDC in the first quarter. This purchase discount will be reversed out of unrealized gains into total investment income each quarter as the legacy OBDE loans mature or are realized. In the first quarter, this amortization income represented approximately $0.02 per share. Importantly, we have amended our investment advisory agreement to revise the calculation of incentive fees to ensure that any income or net realized gains arising solely from the merger accounting treatment will have no impact on the incentive fees payable to blue out. This non-cash amortization will be reflected in our results going forward, and we're happy to discuss this further with you in Q&A or offline to the extent you have any questions. Now turning to our results. We built upon the momentum established in 2024 and delivered another quarter of solid financial performance to begin the year. Following completion of the merger with OBDE, we ended the quarter with total portfolio investments of nearly $18 billion, total net assets of nearly $8 billion, and total outstanding debt of approximately $10 billion. Our first quarter NAV per share was $15.14, down 12 cents from the last quarter. The decline was primarily driven by changes in credit spreads and write downs on a small number of high-focus investments. Turning to the income statement, we reported adjusted net investment income of 39 cents per share, down 8 cents from the prior quarter, which was in line with our expectations. As discussed on our last earnings call, the decline primarily reflects a meaningful reduction in one-time income, including early repayment activity and a dividend we received in the fourth quarter, which together contributed approximately 5 cents to last quarter's NII. In addition, the remaining one-third of the 100 basis point interest rate cuts that were implemented last year flowed through earnings, as well as a small amount of spread compression of approximately 10 basis points. Similar to prior quarters, we over-earned our base dividend, resulting in the board declaring a one-cent supplemental dividend based on our first quarter results, which will be paid on June 13 to shareholders of record as of May 30. As a reminder, we implemented a programmatic supplemental dividend framework to allow shareholders to benefit from the higher returns associated with the increased rate environment, which has worked as designed. The board also declared a second quarter base dividend of 37 cents, which will be paid on July 15 to shareholders of record as of June 30. We believe OBDC is well positioned for the evolving rate environment and that the base dividend continues to be supported by our adjusted earnings, with 106% dividend coverage. Further, our spillover income remains healthy at approximately 34 cents and equates to nearly a full quarter's worth of base dividends. We believe having a meaningful undistributed spillover supports our goal of maintaining a steady dividend through volatile and varying market conditions. Moving to the balance sheet, we are entering the year on a solid footing as our diversified capital structure positions us to withstand the current environment. We finished the quarter with net leverage of 1.26 times, up from 1.19 times, and just outside of our target range of 0.9 to one and a quarter times, which is partly attributable to the one time leveraging event of the merger with OBDP. We also had visibility into a couple of large repayments that slipped into April and as a result, we expect net leveraging Q2 will be within our target range. Since the merger closing in January, we have taken several steps to maximize our capital structure and reduce funding costs at OBDC. During the first quarter and post quarter end, we reset two sales lows and amended two of our bilateral SPVs, producing interest expense for each and extending maturities for most of the facilities. In April, we repaid OBDE's $142 million July 2025 notes, which was modestly accretive to net investment income as the notes had a higher interest rate as compared to OBDC's cost of funding. Lastly, as a reminder, we pre-funded the $425 million of unsecured notes that matured in March by opportunistically raising $400 million through a reopening of OBDC's March 2029 unsecured notes last quarter, which priced a swap spread of SOFR plus 192 basis points, near the secured credit facility pricing levels. These changes represent our continuing efforts to actively improve our liability structure and optimize ROE post merger. Turning to liquidity, we ended the quarter with over $3 million of total cash and capacity on our facilities, which was over two times in excess of our unfunded commitments that can be immediately drawn. Importantly, we have no material short-term securities and our robust liquidity position provides us with more than ample unfunded capacity to meet any near-term funding needs. Overall, we remain very pleased with our results and believe that our balance sheet is well positioned for a more uncertain environment ahead. And now I'll hand it back to Craig to provide final thoughts for today's call.

Thanks, Jonathan. The recent volatility across stocks and fixed income markets has signaled a potential shift in the investment landscape. In periods like this, we believe private credit is poised to capitalize on market volatility by providing support to borrowers and sponsors facing challenges in accessing financing. While leverage at OBDC is towards the high end of our target range, we remain agile and able to deploy capital strategically as repayments come in, which allows us to be patient and pick our spots as we find opportunities. Last year, we experienced a significant number of refinancings, which impacted the overall spread of our portfolio. However, at this point, we believe most of this refinancing activity has played out, which means we have the ability to operate with a high quality portfolio that benefits from stable spreads. This positions us well to be patient and selective, knowing that as public markets continue to experience volatility, the value of the uncertainty we offer to borrowers only increases. While it's too early to say how long this environment will last, we're confident in our ability to take advantage of opportunities given our capital resources and long term investing time horizon to navigate what lies ahead. Looking forward, while macroeconomic uncertainty persists, the market is anticipating a significant reduction in interest rates, which will impact our earnings. That said, we believe our stable earnings profile and compelling risk adjusted returns will continue to make us an attractive option for investors, even in a lower rate environment. As we've mentioned throughout today's call, our portfolio is performing well, reflecting the continued strength and resilience of our borrowers. The stability of our portfolio gives us confidence in maintaining our dividend level for the remainder of 2025. To close, we are very pleased with our first quarter results and the seamless execution of the merger. We're confident in our ability to navigate a more challenging environment ahead, all while delivering attractive returns to our shareholders. Thank you for your time today, and we'll now open the line for questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question at this time, please press star one from your telephone keypad, and a confirmation tone indicate your line is in the question queue. You may press star two if you'd like to withdraw your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question is from the line of Brian McKenna with Citizens. Please receive your question.

Thanks. Good morning, everyone. Craig, it would be great to get your perspective on how the macro unfolded over the past several months. I know you gave a little bit of color, but for some time now, we've talked about just how tight spreads were as banks were really active, and then there's just this lack of new M&A transactions. We finally got some volatility. Banks did pull back. I'm just curious from your seat how spreads trended from February to March, and then from March into April and May. Then at the OWL Investor Day back in February, you stated, quote unquote, I don't know. I haven't seen it yet when speaking about the forthcoming recovery in M&A. Here we are. There's been no change in the broader M&A backdrop. Do you have any updated thoughts on where we go from here? Then if activity remains remuted on the M&A side, does that have any implications on OBDC?

Okay. Thanks, Brian. There are a few pieces in there, so if I don't get to all of them, remind me. My quote unquote, I don't know. I haven't seen it yet. I think that's held up well over time. So I think I was probably spot on there. Look, to try to hit some of the themes that you're asking about, just to pull the lens back. Last year, there was a moderate M&A environment with a really strong, broadly-sidicated loan market, and rates spread tight. So there's a lot of refinancing last year. There are a lot of public and private market dollars chasing a moderate amount of deal flow, and that resulted in spread compression. The hope this year was that there'd be a resumption in M&A. I think there was a lot of optimism with the new administration that would be deregulatory that would result in M&A with the private equity firms needing the return capital. So there was a hope that that would result in more deal flow, more opportunities to deploy, and potentially improve the spread environment. What's happened so far this year is given there's just been, after the initial, I think, optimism around the administration, there's been a lot of uncertainty created by tariffs in particular, and that's had a chilling effect on M&A, both private equity, just in general. The uncertainty around tariffs has created a muted M&A environment, and I think most people expect that to continue for a while, until there's greater clarity. It's hard for companies to want to buy and sell and for there to be an active M&A environment. So I think that will continue to be the case. On the spread front, the public loan market really closed out. It's opened up a little bit now, but the extreme volatility of a month or so ago really impacted the public loan market, so that bit went away. And so spreads, I think, have stabilized. Our hope would have been in an environment with a lot of public market volatility, that spreads would widen. Typically, that's what you would see. We haven't seen that yet. Private credit spreads are stable. I think different market participants might call it 25 basis points wider, 50-50 basis points wider, but I think there's also deals that are getting done in really the same spread they would have gotten done a couple months ago. So I think it's not going any tighter. Our hope is to have it go wider. We are certainly pushing for that in the instances where we think it's appropriate, but there remains pretty modest deal flow. And so the deals we're seeing are good quality. You saw we had an active quarter. I think we'll continue to have an active year. Our portfolio companies, we have a significant number of incumbencies, and are constantly doing net on acquisitions that are smaller, but that allows to deploy capital. I think spreads, my hope is at some point, there'll be a pickup and activity and spreads will go wider a bit, but we're not seeing that just yet. It's a fine environment for investing. I'd like to see more deal flow. I'd like to see a little bit better economic terms, but the quality is very good and the portfolio companies are holding up very well. So hopefully that captures, I think, just what you're asking about. But if I missed any piece of it, just remind me.

Yeah, no, I think you got most of it, if not all of it. So that's super helpful. Appreciate that. There were clearly a few questions in that. So I just have one quick follow up. Is there any updated timeline around the public listing of OTF now that merger is complete?

There's nothing for us to disclose here. As we have with, we've obviously completed a number of strategic transactions, merger of OBD C&E, merger of our two private tech funds. We take a very front footed approach with trying to find ways to deliver value for shareholders, talk to our board regularly about all those activities. And so our tech funds, I don't mean report on it, but our tech fund now combined, the private tech funds would be one of the largest, most consequential BDCs if it were a public company. So if we found a window where we think that makes sense, we would explore that as we have some of the other strategic transactions. So we actively look at each of our funds regularly to see what makes sense, but nothing more specific to report.

Okay. I'll leave it there. Thanks, Greg.

Thanks, Brian.

The next questions are from the line of Mickey Schein with Leidenberg-Thalman. Please receive your question.

Good morning. I wanted to ask- This call

will be recorded. This call is no longer being recorded.

Greg?

We're here, Mickey. I'm not sure what that was. Yeah, I'm

not sure. Sorry. I wanted to ask a spread question as well, but you explained it very thoroughly. So my other question is related to share repurchases. I realize there are windows which open and close for share repurchases, but why not rotate some of the repayments you've received into buying shares during the recent periods of volatility, which would seem to be great use of capital?

So we have a share repurchase program. We've also instituted an ATM program. We look at both tools regularly, weekly, daily. As you know, there are windows for share repurchases, and they're meaningful windows, which I won't get into precisely here, but they're measured in weeks, not in days. If there are environments that line up with our windows to buy shares, that's the conversation that we'll have with our board. It was not that long ago that we've been above book value, so these things move quickly and they have to line up. We've used the share repurchase in the past, and we can look at using it again. I agree with your instinct, which is we think that stock trading where it is is not reflective of the fundamentals of the portfolio performance, which continues to be excellent. The yield on our stock today on our base dividend is close to 11%, and we haven't had any credit issues, and our peers that have comparable credit quality of trading book value, we traded 90 cents of book value. So we agree with the sentiment that our stock is attractively priced. Obviously, the capital is very valuable to deploy, so we always weigh that, but it's something that we will continue to look at.

If I understand correctly, that recent period of volatility where we saw a sharp sell-off over a few days, it just didn't coincide with one of the windows being open. Is that correct?

It is correct.

Okay. Thank you for that. That's it.

Thank you. Our next question comes from the line of Casey Alexander with Compass Point. Please proceed with your questions.

Yeah, this is for Jonathan. Jonathan, not being as familiar with the liability structure that you inherited from BlueOut3, I'm curious if there's anything in BlueOut3's liabilities that you inherited that are going to offer some opportunities to rationalize some of those liabilities at lower cost.

Yeah, I know that it's a great question, something that we definitely talked about at the time of the merger, that we felt that there were going to be opportunities. We've already started to take advantage of some of those on the security side by repricing certain drop-down facilities that we have in place, as well as repricing the CLO. And subsequent to quarter end, we took out notes that we had issued at OBDC3 that were a high coupon as well, at the first possible chance to take those notes out. So there's more there to do. And as the call dates come up, we'll certainly be able to take

advantage of that. Thank you. The next question is from the line of Robert Dodd with Raymond James. Please receive your questions.

Hi, guys. You've answered the spread in M&A1 really clearly in case you got the liability one. So going back to kind of your opening remarks here, I mean, at this point in your underwriting case, when you're looking at New Deal, what are you ranking, maybe qualitatively, not quantitatively necessarily, as the probability of a near-term recession? I mean, you always put one into kind of your underwriting case. And for a lot of your businesses, they're not that economically sensitive because of the services side. But is that kind of near-term view, the second half of 25, has that view changed on the probability of a meaningful or moderate economic slowdown?

Sure.

So look, I'll try to answer your question, but I'm going to just try to give a broader lens to it. The economy can be gangbusters, and we're running downside cases. We're, you know, every deal, every investment we've made in our history has a recession case in it. Every deal in our history has a liquidation case in it. So we're extremely downside focused, and it's a hallmark of our underwriting process. In addition to that, as you know, we're buying businesses, we're investing businesses, excuse me, that are not that typical. That is also a hallmark of our investment process. Software, insurance, brokerage, healthcare, food and beverage, mostly US businesses, mostly stable, mostly annuity-like revenue streams. That's what we like to invest in. I'll also repeat what we said in our prepared remarks. We're not seeing any economic weakness in our portfolio companies. Now, we are not a forward indicator of the US economy because we're selecting into the most stable parts of the US economy. So we wouldn't see it, but we're not. If what you're asking me is, are we especially concerned about an economic slowdown in our underwriting process? I think the answer is yes, we are. I mean, you know, we follow economic developments as closely as, I think, most investors would. And there have been sizing changes to US trade regulations that many feel are going to potentially impact the economy later this year. And so, of course, we're taking a serious look at that and factoring that into our base case rather than our downside case. So I think that that's just sort of responsible in lending in this kind of environment. And we are a downside in orientation. So we're taking that into account. And it's probably our expectation. It's not going to change the kinds of investments we're making because we were already selected out of the type of investments that would be most impacted by that type of a downturn. But it certainly on the margin makes you that much more cautious about how much leverage you put on a business that even though it's not cyclical, like every business is impacted if there's a recession and even very stable ones. So we're certainly factoring that in. And it's, you know, we insist that that introduces a level of caution as we look to deploy additional capital.

Got it. Got it. Thank you for that. Now, one more, if I can. I mean, on, you know, now the businesses have been combined, the asset base is bigger. You've got a little bit more room, now under your non qualified bucket or any of these other, you know, diversified lending strategies you follow between wingspire, etc. I mean, any incremental, and I think I asked you about this last quarter, but any incremental thoughts on like, now that they're combined, bigger balance sheet, how much of that non pure traditional firstly, and I'm not saying it's high risk or anything, but, you know, those differentiated strategies you want within this vehicle.

So, as you're alluding to at OBDC, previously, we had fairly meaningful investments in a number of sensory portfolios of assets on the asset based lending business, we have a loan joint venture, our aircraft and rail car, women finance, give or take those are measured in the low double digits of the asset pool, OBDE had had much less. And so, we would certainly look to true up, you know, the combined portfolio and essentially get a portion of incremental exposure by just getting the combined asset base to where OBDC was previously. These have been really good investments. Again, they're the underlying pools of assets within each of these investments are diversified pools, diversified pools of loans. Typically, we have a life insurance settlements business, a drug royalty business, they're diversified underlying pools that have delivered depending upon the structure, low to mid teens, so they're accretive to OBDC. We think they're, you know, risk appropriate. And over time, we'd like to continue to grow our exposure to the existing ones. And if we could find one or two additional strategies to invest in, we would do that as well. Again, today, it's combined, you know, low double digits, you know, we're going to be patient as we grow this. But, you know, over the next couple years, if we could take that number up to, you know, 15% versus 12%, I think that would be very valuable for shareholders. And we're working with experienced teams that have, you know, good deal flow, chunky opportunities, and we'll look to support them and find good investments through that venue.

Thank

you. Our next question comes from the line of Casey Alexander with CompassPoint. Please just use your questions. Mr. Alexander, please go ahead with your questions.

Yeah, I just wanted to follow up real quick. I just want to make sure that the variable dividend structure is going to be toggling off of adjusted earnings and not the gap number.

Casey, that is correct. It's off of adjusted.

Okay, great. Thank you.

The next question comes from the line of Sean Paul Adams with B. Riley Securities. Please receive your questions.

Good morning. I think you already touched on part of this question earlier in the call. But, you know, now that the OBD merger has closed, you know, what kind of specific operational efficiencies besides just the refis are you guys tracking? I believe earlier in the quarter you had mentioned expecting maybe 50 to 75 bits of ROE uplift from portfolio optimization. How far along are you in realizing those gains? And when would we see the full benefit to OBDC?

Sure. Maybe I'll start and pass to Jonathan because there's two fronts that we highlighted in time of the merger. First was, I call it market dependent and investment related ROE optimization efforts. Some of those are exactly what Craig was just talking about, is continuing to deploy to creative JVs and strategic equity opportunities like our platforms, Wingspire as one example, and OBDE was underweight some of those opportunities. And so getting that back up as part of the combined portfolio would be top of that list. And that certainly takes time to deploy into the assets at that level, but it's something that we're already working on. Additionally, there are others where OBDE was a slightly different portfolio mix. And part of that's market opportunity set dependent. Today we see the best relative value as mentioned during the call in first lanes in Unitroch, but we are open if the return opportunity and the relative value opportunity improves to looking at second lanes or junior capital where OBDE was also underweight. So some of them are more market dependent, JVs is more time dependent, and we're working on those now. And then there are cost structure sides, which I'll let Jonathan touch on.

Yeah. So look on the operating expenses, you get to see those pull through rather quickly. And so in Q1, we were able to already see approximately 10 basis points of what I'll call synergies on a relative basis to where PubX was across a number of categories in 2024.

I appreciate the color. Thank you.

Thank you. Our next questions are from the line of Phinney and O'Shea with Wells Fargo. Please just use your questions.

Hey, everyone. Good morning. So I might be piggybacking on Robert's question here, but I want to go back to spread as well, appreciating the contemporary puts and takes. You know, longer term, you and your large market peers have these burgeoning wealth products, and you're going more and more upmarket in deployment. So do you think there's more of a firmly secular trend downward on spread? And if so, will the public BDC continue to stay on that bus or pivot more meaningfully toward higher spread? You know, I think you mentioned ABF or just other sort of old school private credit strategies. Thank you.

Sure. Let me try to take a stab at that. Look, just for just a level set, the spread in our portfolio today is, at the end of this quarter, was 590 over. I think it's an excellent spread, even with base rates where they are. That's an absolute all in return of north of 10% for portfolio, primarily first lien assets to good companies. So spreads have come in. I don't think it's a secular shift. I think it's a cyclical shift. The strength and the syndicated loan market, which is a market that we do compete with, drove spreads down last year in an environment with light M&A. Give us a window where either there's more M&A or a closed public loan market, and I think spreads will widen. So I view it as just a typical cycle, not a secular shift. You're right that there's been a growth in the non-traded BDCs in the wealth channel. That's we participate in. But at the same time, the addressable market for those deals have expanded in pace. The growth in that channel is what's allowing us to finance deals that are $3, $4, $5 billion at a clip. And so the market is growing as the capital is growing to support that market. And the private equity firms are choosing to use direct lending solutions to finance bigger deals the way they never have before because they like the solution. And we get a premium to the public markets. So that all feels good to me. I also think that the larger deals are just really good credits. And I think that this is an area that observers just don't fully give us credit for. When we're financing deals that are $3, $4, $5 billion, these are $8, $10 billion companies with $4 billion equity checks from private equity firms. The industry is just much higher quality than it was 10 years ago. And I think it's one of the reasons why I expect it will continue to perform from a credit standpoint. In terms of our strategy for OBDC, our strategies remain the same. We have been from the beginning focused on credit quality versus all else. And we continue to think that the quality of the upper middle market company is attractive. And that's where we seek to play. And I would also offer that I think that spreads in smaller deals are the same as the upper middle market. And I know there will be others out there that will argue otherwise, but that's not what we're seeing. We look at everything that's out there and we think it's pretty comparable. So we think we're getting better quality for comparable spreads. I also think that our portfolio of high quality upper middle market loans that's diversified and it's yielding 11% holds up really well in this environment. I don't think we have to change our strategy. I think our strategy is delivering great returns for investors. And so I think that's all working. We, as you know, and as many know, at Bluel, we have expanded our credit platform. We have gotten into alternate credit or asset based lending, which some will use that term. That's a capability that we didn't have in scale before. That may produce opportunities for us to occasionally put some of those assets into the BDC if we think that they're of proper credit quality, can deliver kind of the consistent income that we're known for. But that's really on the margin. We're not looking to change our strategy. I think that this will continue to be attractive risk adjusted return for investors.

Very good. Thanks. And just a follow up, John, you mentioned spillover as support in the evolving base rate environment. Does that mean you'll say if base rates go more firmly against us here, that you'll run that down and earn below the dividend until that's through? Or what will your posture be, I guess, if and when SOFR pushes earnings below the dividend?

Yeah, I mean, look, if you spillover income as good for helping to sustain the dividend during periods of volatility, that was what I had indicated in my prepared remarks. I'm not at all saying that we would use the spillover and run it down if we were permanently impaired in terms of our income relative to the dividend. We're just not at that point now. And so what we're saying is that having the cushion of spillover income to sustain a dividend for a quarter or so during a period of volatility is what you use it for. But we like that cushion. And in no way are we indicating that we would run it down and utilize it in order to sustain a dividend that's not earnable for the long term. So in a much, much lower rate environment, we're having a different conversation.

That's helpful. Thanks so much.

Our next question is from the line of Maxwell Fritcher with Trua Securities. Please receive three questions.

Good morning. I'm one for Mark Hughes. Can you provide any color on what you're seeing in the pipeline in terms of mix of new versus incumbent borrowers and maybe even types of deals you're seeing, terms, covenants, anything in particular to call out?

Sure. It's been remarkably consistent with prior quarters. And so to Craig's point, we didn't necessarily see the tick up in M&A in the late fourth or early first quarter. And so it's been a consistent first quarter. More than half of our deal flow in the first quarter came from existing borrowers, add-ons and refinancings. And the majority of the cases when there was a refinancing, we were able to do additional size. And so incumbencies have been a majority source of our deal flow. Looking forward, our pipeline for the second quarter is trending in the same direction. Quite a bit of existing borrower transactions, more than half. And sporadic M&A, there's been quite a few attractive deals already announced. One deal north of $4 billion that was publicly announced just a few weeks ago. And there are a few more that we're looking at in the pipeline that are quite attractive and sizable. So no change to the landscape relative to Q1 from a pipeline perspective and still fairly attractive and up in scale.

Understood. Thank you. And then you'd mentioned the decrease in pick. From borrowers transitioning to cash pay, do you have any visibility in the near maybe medium term for other borrowers to do the same?

Sure. Exactly right. So in the first quarter, we had five names that went from partial pick to fully cash pay. And so we do have visibility to others likely going off their pick options. Again, some of these windows, it is at the borrower's option. And so sometimes it's voluntary and sometimes it's time-based. But we do have visibility and we expect our pick to be consistent. We at this point have had a number of quarters in a row back through the full year 2024 where we've been range bound on pick. And we've had now a couple of declines. So we would expect our pick to be consistent based on our visibility so far. And also last year, we had the benefit of a number of refinancing. So opportunistic refinancing of junior capital into delevered capital structures into first liens or simply takeouts with cash flow. And yet to the extent that the markets are open and active in terms of refinancing, we will continue to see that.

Very good. Thank you.

Thank you. At this time, I will turn the floor back to management for further remarks.

Right.

Thanks everyone for joining. We're always available. If you have any follow-up questions, just reach out. I feel really good about the quarter and appreciate everyone joining the call. Have a great day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.