Owl Rock Capital Corp (ORCC) Q1 2020 Results Conference Call May 6, 2020 11:00 AM ET
Craig Packer - Chief Executive Officer
Alan Kirshenbaum - Chief Financial Officer and Chief Operating
Dana Sclafani - Head of Investor Relations
Conference Call Participants
Casey Alexander - Compass Point
Ryan Lynch - Keefe, Bruyette & Woods
Mickey Schleien - Ladenburg Thalmann
Robert Dodd - Raymond James
Kenneth Lee - RBC
George Bahamondes - Deutsche Bank
Finian O’Shea - Wells Fargo Securities
Chris York - JMP Securities
Good morning and welcome to Owl Rock Capital Corporation’s First Quarter 2020 Earnings Call.
I would like to remind our listeners that remarks made during the call may contain Forward-Looking Statements. Forward-looking statements are not guarantees of future performance or results and involve a number of risks and uncertainties that are outside the Company’s control. Actual results may differ materially from those in forward-looking statements as a result of a number of factors, including those subscribed from time-to-time in Owl Rock Corporation filings with the Securities and Exchange Commission. The Company assumes no obligation to update any forward-looking statement. As a reminder, this call is being recorded for replay purposes.
Yesterday, the Company issued its earnings press release and posted in earnings presentation for the first quarter and year ended March 31, 2019. This presentation should be reviewed in conjunction with the Company’s Form 10-Q filed on May 5th with the SEC. The Company will refer to the earnings presentation throughout the call today, so please have that presentation available to you. As a reminder, the earnings presentation is available on the Company’s website.
I will now turn the call over to Craig Packer, Chief Executive Officer of Owl Rock Capital Corporation.
Thank you, operator. Good morning everyone and thank you for joining us today for our first quarter earnings call. This is Craig Packer and I’m CEO of Owl Rock Capital Corporation and a Co-Founder of Owl Rock Capital Partners.
Joining me today is Alan Kirshenbaum our CFO and COO; and Dana Sclafani our Head of Investor Relations. Welcome to everyone who is joining us on the call today. We hope you and your families are safe and well during these unprecedented times.
At Owl Rock, we have been incredibly focused on managing our portfolio while taking the necessary steps to ensure the safety of our team and maintaining full operational continuity. Our entire team has been working remotely for two months and we are proud and appreciative of their efforts to engage closely with our borrowers, partners, and service providers while always striving to be accessible to all of our stakeholders.
Recognizing this environment is markedly different than any anything, any of us have ever seen. I will start today’s call briefly discussing our investing activity, financial highlights for the first quarter, but then spend the bulk of our time on what we are seeing across our portfolio and our response to these challenging conditions. Then after Alan covers our financial results, I will conclude by discussing our outlook and what may come next.
Getting into the first quarter highlights, net investment income per share was $0.37 for the quarter, the same amount as the fourth quarter. We ended the quarter with net asset value per share of $14.9 down 7.5% versus the prior quarter primarily reflecting the unrealized losses across the portfolio resulting from the significant spread widening we saw in the market at the end of the quarter.
Looking forward for the second quarter, our Board has declared a dividend of $0.31 per share, the same amount we have paid each quarter since our IPO and which is in addition to the previously declared special dividends of $0.08 per share.
Moving on to our investment activity. In the quarter, we completed $731 million of new investment commitments, $616 million of new investment fundings and $198 million of net funded investment activity, which was net of $418 million of sales.
In-line with my comments on our fourth quarter call, this quarter we did see lower than average origination levels which reflected lower levels of private equity deal activity. In addition, we saw an increase in prepayments.
We added seven new portfolio companies this quarter with investments across four first-lien facilities, three of which were unitranche facilities, two small second-lien term loans for companies in the software space and one modest sized equity investment. The weighted average spread of the new investments was 610 basis points. We are pleased with the spreads we were able to achieve this quarter.
We also increased our investment in 11 portfolio companies largely reflecting add-on facilities used to support acquisitions. We had full pay downs on four portfolio companies, bring the total portfolio at the end of the quarter to $8.9 billion across 101 borrowers.
While this reflected a lower level of net activity in previous quarters in-light of the change in the market environment this has proven to be a silver lining as it leaves us with that much more dry powder to weather the storm that is arrived and to take advantage of future opportunities.
While we are pleased with our investment performance for the quarter and we would be happy to discuss it further during the Q&A session, in-light of the dramatic change in the environment due to the COVID-19 pandemic, we thought it would be most useful to share as much perspective as we could about how this environment impacts our business.
To start, I want to offer some context. We believe, we entered this unique period in a position of relative strength. Our portfolio consists primarily of first-lien term loans to upper-middle market businesses with an average EBITDA of $83 million.
We tried to assemble our portfolio in a defensive minded manner by focusing on large, stable, recession resistant businesses. We are well diversified across 27 industries with no industry representing more than 9% of the portfolio and our top 10 positions representing 24% of the total.
Since inception of portfolio performance has been very strong and coming into this crisis by and large most of our companies were performing very well at or exceeding our expectations. We focus our portfolio on financial sponsor-backed companies, because we believe that sponsors can provide financial and operational support to their portfolio companies, which can help them weather challenges and preserve their long-term value.
On this note, one benefit of having a relatively younger platform is roughly two-thirds of our sponsor-backed portfolio companies are owned and private equity funds with either permanent capital or relatively recent vintages, generally in funds that have closed in the last four years.
And that these investments tend to benefit from the dry powder available in these funds, meaning that sponsors have both the motivation and the ability to continue to provide financial support to these portfolio companies.
In addition to a well-performing portfolio, we also entered this period with a strong balance sheet. Alan will touch on this later in the call, but we believe, we have one of the strongest balance sheets in the sector, which provides us with superior level of flexibility to navigate the challenges ahead.
With all that said, I would like to turn now to our response to the unique challenges posed by the COVID-19 pandemic. Given the sudden and dramatic change to the U.S. economic outlook, our focus across all Owl Rock has been on protecting our portfolio and our balance sheet.
With respect to Owl portfolio, we have taken a number of steps to enhance information flow and communication and to prepare for the needs of our companies so that we can protect our investments. In addition to our normal underwriting and portfolio management process, we have rolled out an enhanced portfolio monitoring and management.
Since the scope of the crisis became clear, we embarked upon a re-underwriting of each name in our portfolio to assess the potential impact and the stay-at-home environment. We have been closely monitoring portfolio exposures to COVID with a new portfolio heatmap focused on risks in both impacted sectors as well as impacts to individual names.
We have spoken with each of our borrowers and their sponsors to understand what is happening on the ground at the portfolio companies and what may come next, and the strategic and operational steps being taken. These conversations are ongoing, happening weekly or even daily as updated information emerges.
As our investment teams undertake this work, they share the latest updates with our leadership team in real time. In addition, we are holding weekly meetings to discuss portfolio company developments in greater detail with the full investment committee.
This effort has been led by a portfolio management task force of our most senior underwriters, which was created to provide enhanced level of support for each investment. This taskforce is led by our Chief Underwriting Officer and our Head of Portfolio Management.
We also continue to add to our workout capabilities. In April, we brought on board a new Head of Workout who previously held this role at another direct lender. With more than 55 experienced investment and portfolio management, professionals, many of who have spent years in the direct lending space and have experience investing through a credit cycle.
We believe, we have all the necessary resources to manage the portfolio through this difficult period. We have asked several senior members of our team with significant workout experience to dedicate their time to portfolio management, including workouts as they arise, and we plan additional hires in this area.
We have a portfolio of companies which were quite healthy prior to the crisis. However, the nature of the economic shutdown has created pressure on many companies needs for near-term liquidity. So we are focused on that for each of our borrowers. Given the uncertain outlook, we are running downside scenarios in this the economic impact is felt for a sustained period of time.
I will touch in more detail on our current investment posture later in the call. But our focus right now has shifted to primarily preserving significant capital to support our borrowers should they need it, so that we can protect the value of our investments.
On that note, I would like to touch on the revolver activity that we saw this quarter. In the first quarter, we net funded approximately 215 million under our outstanding revolving credit facilities, resulting in approximately 60% of our total revolving credit facility commitments being drawn.
Some of this was for normal course operational funding. However, some borrowers chose to draw down on their revolvers to shore up their liquidity. This was an orderly process, and we have seen this activity level off. Alan will spend more time on this shortly.
But I would highlight that we have multiples of the necessary liquidity to fund the entire balance of our undrawn commitments should we need to. Beyond funding revolving credit facilities, we also have ample financial resources to provide financing to our portfolio companies, where we feel it is prudent.
Lastly, the financial sponsors we back typically have substantial funds available to support their portfolio companies. We are discussing with many of them what the support might look like, and we expect they stand ready to provide it should their companies need it.
Now I would like to discuss the current state of our portfolio. First, let me state the obvious. U.S. economy is going through an unprecedented dislocation and it is simply not possible to tell how long this will last and what the impact will be. But we can give you a relative sense of what we see as the positives are of our portfolio, and areas of greater concern. I would point you to page 12 of our earnings presentation with our sector exposures for more detail.
Since inception, we have focused on building a diversified and defensive investment portfolio. Our six largest sectors our software, professional services, insurance, healthcare providers, distribution and food and beverage, which collectively comprise approximately 46% of our portfolio. Generally speaking, we think this is a solid core group of sectors that should hold up better than most in the current economic environment.
Software has always been one of our largest industries. We believe, our software investments will be amongst our strongest investments, and the most resilient in the face of the economic environment.
These products are used by their customers as part of daily operations and these companies often have contractual revenue streams, and high customer retention. As customers are unlikely to cancel their technology solutions, as long as they remain in business.
So while we believe these software companies may see a decline in revenue from a decreased customer base. Overall, we think revenues of these businesses will be cushion from declines in the economy.
All of our distribution businesses have been classified as essential businesses and continue to operate albeit at reduced levels, and our professional services businesses have largely transitioned to a work-from-home environment.
Our insurance businesses which address health and other risks are often sold remotely and typically have a predictable recurring annual renewal process. In our healthcare businesses, while some names have seen a slowdown.
Due to the temporary restrictions on non-essential medical procedures, the underlying business operations remain fundamentally sound. Further, many expect this will be one of the first areas to reopen, and we expect these businesses will return to more normal operating levels.
Many of our food and beverage businesses are actually benefiting from the increase in at home food consumption. That is not to say there won’t be any idiosyncratic impacts felt in these sectors. But we do think our companies in these sectors should hold up better than others.
Now let’s turn to areas of greater focus. In aggregate, we have modest exposure to the sectors that have been most impacted. We have limited exposure to oil and gas as a sector, which represents only 2% of our portfolio and within that sector, we focus on companies providing midstream services with less impact from falling commodity prices.
That said and certainly want to be candid with you. We do have companies that are experiencing a direct impact from the economic shutdown. While we do not have direct exposure to the travel and hospitality sectors, we do have several means, which serve the travel or hospitality end markets.
In addition, some of our companies have ultimate end markets in the leisure and personal care space, which are seeing a direct impact from store closures. We have a couple of investments in the aerospace sector, which are materially impacted by the drop in aircraft production and commercial airlines travel. We have several smaller investments in quick service restaurants, which may still have doors open are seeing a significant drop in same-store sales.
In addition to these focused sectors, we certainly expect a significant drop off in economic activity to broadly impact our portfolio. You can see these developments reflected in our internal credit ratings for the quarter.
We downgraded investments representing 4.8% of the portfolio to four rating on our internal rating scale. This is the first time since our inception that we have investments in this rating category, which we define as alone where the risk has increased materially since origination.
The portion of the portfolio that is three rated increased to 6.8% from 5.3% last quarter, bringing the total of three and four rated investments to approximately 12%. We ended the quarter with no names on non-accrual status. Consistent with our results since inception.
Through the end of March, each of our 101 portfolio companies were current on their contractually obligated interest payments. For two of our borrowers, we and the other lenders in those deals agreed that the interest payment could be made as pick in order to enhance the company’s liquidity.
In addition, after quarter end, we have one company National Dentex that remains in an uncured covenant default. This company remains current on its interest, and we are in discussions with the company and sponsor on next steps.
Later in the call, I will make some further comments on how we are approaching the portfolio. But I would remind you the average loan-to-value of our investments is approximately 50%. This means, on average, our companies could lose 50% of their value and we would still not be impaired.
While, we don’t want to minimize the magnitude of the challenges ahead as they are significant. We entered this period with a healthy portfolio of businesses, which we believe will come through the crisis retaining meaningful value.
We are focused on working with the sponsors and ensuring our borrowers have the financial wherewithal to make it through these challenges so that we as best we can realize the full value of our investments in each case.
Before I turn it over to Alan, I want to touch on two events that occurred following quarter ends. The first was the expiration of the second tranche of our share lockup. As a reminder, 100% of our pre-IPO shareholders were subject to a lockup on approximately 375 million shares outstanding at the time of our IPO in July, 2019.
On April 14, the second tranche of 125 million shares became freely tradable increasing our public float to 270 million shares. The final 125 million locked up shares will become freely tradable on July 20th.
We also announced on April 1st that our Board of Directors unanimously approved a reduction of the Company’s minimum asset coverage ratio from 200% to 150%. Once effective, we plan to target the debt-to-equity range of 0.9 times to 1.25 times, which would allow us to operate with an increased cushion regulatory threshold.
I want to underscore that this decision was not driven by any recent changes in the market or economic environment, but rather it is a part of the natural evolution of ORCC’s balance sheet over the past few years. This was primarily driven by our desire to have an increased regulatory cushion from our target leverage level, not to operate with significantly higher leverage over time.
From the inception of ORCC, we have worked hard to build a strong reputation and track record with our stakeholders including equity investors, lenders, bondholders and rating agencies and feel this was the right time to take this step.
To that end, we are pleased that each of the rating agencies affirmed our investment grade rating and outlook following this announcement. The reduced asset coverage will enhance our ability to deliver attractive returns to shareholders, while continuing to prudently manage risk and maintain a strong balance sheet.
Now, I will turn it over to Alan to discuss our financial results in more detail.
Thank you, Craig. Good morning everyone. First and foremost, we hope that you and your families are all safe and healthy. These are certainly unprecedented circumstances and we want to thank you for your continued partnership and support.
There is a lot to cover today, so I’m going to hit the numbers for the quarter now and then we will get into a series of other important topics. To start off and you can follow along on Slide 7 of our earnings presentation. We ended the first quarter with total portfolio investments of $8.9 billion outstanding debt of $3.6 billion and total net assets of $5.5 billion.
Our net asset value per share was $14.9 as of March 31st compared to $15.24 as of December 31st, and now decline of approximately 7.5% quarter-over-quarter. Our dividends for first quarter was $0.31 per share plus an $0.08 per share special dividends, and our net investment income was $0.037 per share.
On the next Slide, Slide 8, you can see total investment income for the first quarter was roughly flat at a little over $200 million or $0.52 per share. Although our total funded par, the principle amount of loans, which is what interest income is calculated off went up approximately $500 million quarter-over-quarter this was largely offset by the decline in LIBOR.
Expenses were also flat quarter-over-quarter leading to NII flat at $56 million or $0.37 per share. Our cost-of-debt continues to come down, driven largely by the decline in LIBOR. Our other expense ratio continues to be among the lowest in the industry at 25 basis points on a trailing 12 month basis, and we have $0.14 per share in undistributed distributions as of March 31st.
There are a number of key topics I wanted to cover today. First, when I pulled the lens back, the first thing I think about is our financial philosophy. Having been a CFO in the BDC space for a long time now, I have seen a lot of financing structures, and different ways folks have chosen to build their financing landscape.
At the end of it all coming into this crisis or probably any crisis, I think of there being three pillars that are very important that are really key that can put you in a significant position of strength. The three pillars are one, a low level of leverage. Two, a lot of liquidity. And three having issued unsecured debt, which prevents you from being overly reliant on secured debt.
So for ORCC, we have one of the lowest leverage levels in the industry at 0.60 times debt-to-equity. We have $2 billion of liquidity and we have issued 1.5 billion of unsecured debt. So to sum this all up, we answer this crisis from a significant position of strength.
And we are in the process of adding to that position of strength by creating more cushion for our regulatory cap with a decrease in our asset coverage requirement to 150%. Our shareholders are set to vote on this at our annual meeting on June 8th.
We also have been in discussions with the lenders for our senior secured revolver to amend the covenants in our credit agreement, allowing for the 150% asset coverage level. I’m pleased to announce today that we now have the approval we need to complete this and we will close this amendment this week.
Another key topic is our liquidity position. As I just noted, we ended the quarter with $2 billion of liquidity in cash and undrawn debt capacity. We have 0.6 billion in undrawn commitments to our borrowers, 0.2 billion in the form of undrawn revolvers, and 0.4 billion in delay to our term loans. Most of which is tied to acquisitions financing.
So to describe this another way, we could fund these undrawn commitments to our borrowers almost 3.5 times over. Another way to think about our liquidity position is to say we have enough liquidity based on today’s NAV to go to one time debt to equity without raising another dollar of debt. And from a leverage perspective, we have a very large comfortable cushion to our regulatory cap. That is a very good position to be in right now.
Now to cover our funding profile. We are very well capitalized with attractive financing structures, which are well matched to our assets from a duration perspective and diversified across financing facilities and lenders. Our weighted average debt maturity is over 5.5 years and we do not have any debt maturities until December 2022.
We have four investment grade ratings. This has helped us issue $1.5 billion of unsecured bonds. This means that 40% of our funded debt capital is an unsecured debt, which provides us with significant unencumbered assets and meaningful over collateralization of our secured credit facilities. And we have limited exposure to mark-to-market across our secured credit facilities.
As an example of how over collateralized our balance sheet is. If we were to draw down all of the remaining capacity under our senior secured revolver, which we have the full ability to do at any time. We would have approximately 6.4 billion of fair value of investments, supporting collateralizing, outstanding debt of 1.2 billion on our revolver, that is over five times collateral coverage. That is also a very good position to be in right now.
Also key here, our asset liability rate sensitivity. As LIBOR has continued to decline due to recent actions by the Federal Reserve. We are focused on how lower rates will impact our operating results.
The weighted average yield on our debt investments at fair value in the quarter decrease from 8.7% to 8.4%, driven largely by the decline in LIBOR. However, our debt investments are subject to LIBOR floors, and the weighted average LIBOR floor is 86 basis points which should minimize the impact to NII of further material declines in LIBOR.
Similar to last quarter, the impact of the current decline in LIBOR was partially mitigated due to the floating rate nature of our liabilities. With our weighted average cost of debt declining 40 basis points to 4.2%.
Today, approximately 80% of our debt is floating rate, which means we are well matched and generally allows our overall borrowing costs to move roughly in-line with broader movements in rates. To the extent LIBOR declines below our debt investment floors, we should experience modest NIM expansion.
And finally, my last key topic, our evaluation process. As a refresher, we implemented from day one a best-in-class valuation process here at Owl Rock across our entire platform. An independent valuation firms spend a lot of time with us throughout each quarter, and at the end of every quarter, independently marking every position. They provide a point estimate for each investment, not arrange, and that point estimate is provided to our Board of Directors for Board approval.
As part of this process, there are two major drivers of fair value, one change in spreads what we call market adjustments, which is the impact of credit spreads, widening or tightening and can make fair values go up or down. And two, credit adjustments, which can also make fair values go up or down. For the first quarter, our total unrealized loss was $1.17 per share. Approximately 75% of this amount was due to credit spread widening.
Okay, some other notes before I wrap up. As a reminder, we put in place a number of shareholder friendly structural features in connection with our IPO. That included a fee waiver and a series of special dividends.
During the quarter, we waived $42.5 million of fees. In total so far since going public, we have waived over $115 million of fees. We continue to pass this fee waiver on to our shareholders in the form of special dividends that our board has previously declared $0.08 per share per quarter throughout 2020.
Under the terms of our programmatic buyback program, through April 30th, we purchased 10.3 million shares, which equated to approximately $122 million. Given the programmatic nature of the plan, the repurchase amount is governed by a preset buying formula and as a function of liquidity in our stock.
As a reminder, the plan is nondiscretionary active on any day the stock trades below our most recent NAV per share, and operates within the parameters of Rule 10B18 which set the maximum daily volume restriction for buying back stock at 25%.
Okay, so now to wrap up a few quick closing comments. First, we enter this crisis from a significant position of strength and continue to be in a very strong position structurally. We are at a very low level of leverage, we have a substantial amount of liquidity. And due to the unsecured bonds we issued, our secured lenders are very significantly over collateralized.
Next, we have four investment grade ratings, none of the agencies have changed our rating for outlook since the crisis has started, or following our announcement for adopting the lower asset coverage requirement of 150%.
And finally, given everything I just discussed, we wanted to point out that we are not making any changes to our dividend policy, nor we making any changes to our previously declared special dividends.
Thank you all very much for your support and for joining us on today’s call. Craig, back to you.
Thanks Alan. I want to spend the last few minutes discussing our current activity and outlook. Not surprisingly, new deal activity has slowed. Private equity firms are focused on their existing portfolio companies and in this environment it will be difficult for buyers and sellers of assets to agree on prices.
In addition, most companies have paused their acquisition plans. Given our strong balance sheet and sponsor relationships, we are seeing some very interesting opportunities to provide financing to companies seeking enhanced liquidity.
However, given the economic uncertainty, our bar to invest in new situations is extremely high, and until the environment stabilizes, we don’t expect to invest significant capital in new portfolio companies.
While we have highlighted our liquidity and available capital, we are focused on preserving net capital primarily for our existing portfolio companies so we can protect the value of our existing investments.
Clearly, we are preparing for the results of our portfolio companies to be significantly impacted in the second quarter is this will reflect the full impact of the economic slowdown. We are focused on each company’s liquidity profile and are in close dialogue with them on the steps they are taking to reduce costs and manage near-term cash flows.
In the second quarter, we expect to see an increase in discussions with our borrowers and their sponsors around the need for covenant amendments and the quest for additional support. We are entering this period with the financial and portfolio management resources to be a resilient source of support, but with the clear objective of protecting each of our investments with the goal of getting back par on our original investment.
While we always expect some level of loss in our portfolio, we remain focused on this goal of getting back par even sitting here today. We have been encouraged by the tone of the conversations with many of the private equity firms and expect a number of them to continue to invest equity in their companies.
Well not our preference and a last resort should there be hopefully a limited number of situations where we need to achieve that goal by taking over ownership of one of our companies, we are resourced and prepared for that. Given the strength of our platform and the depth and experience of our team, we feel this will be an area where we can differentiate ourselves and optimize outcomes for our shareholders.
We believe many of our borrowers while struggling today are fundamentally attractive businesses that will recover in line with the eventual broader economic reopening. I would note that the vast majority of the unrealized losses and NAV declines we reported this quarter reflect the impact of the spread widening in the markets.
Since quarter end, we have seen market spreads tighten, which if sustained will increase the value of our portfolio. However, what ultimately matters most is getting repaid on our loans at par.
For now, we are focused on working with our borrowers to get through this near-term period in order to preserve the long-term value of the company and continue to protect the downside case for our investments.
These events have highlighted the size and resources of our platform and our balance sheet, we believe we will be one of the lenders to private equity firms will increasingly turn to, given our ability to provide sizable customized direct lending solutions, our large high quality team and our differentiated relationships.
We also believe that the value proposition of direct lending is that much more attractive as a syndicated loan and high yield markets have seized up and banks are unwilling to make new commitments. As the economy eventually recovers from this crisis, we believe, we are well positioned to take market share and to emerge and improve market position.
As we gain better confidence around the needs of our portfolio companies, we believe we will eventually be able to shift our focus more towards new investment opportunities. Given the market disruption, we believe these new opportunities will offer very attractive economics, company packages and structural protections.
As we think about capital deployment in the context of returning to our target leverage level, we still expect that we will be at around 0.75 times around the middle of the year. It is important to note that we are not in a rush to increase leverage. Instead, we are focused on deploying capital defensively in situations and which we have high conviction.
Longer term, we feel there are several areas that will allow us to increase returns on our capital. We expect to maintain our focus on primarily first lien investments including unitranches. We expect new loans will have improved economic terms including spreads OID and call protection.
Given our platform attributes, we hope to increase market share for the most attractive credits. While we are in no rush to increase our leverage, should our shareholders approve our request to increase our regulatory cap to two to one times, we will eventually be able to modestly increase our leverage to a target of 0.9 to one and a quarter times, resulting in improved returns.
As conditions improve and existing loans are repaid, we will be able to reinvest proceeds at more attractive spreads. I would note that we have a significant amount of high quality, but lower spread first lien term loans in our portfolio that are currently at a spread of L plus 500 or less, which as we paid would provide an opportunity for increased spreads.
In closing, I want to reiterate a few points. The economic outlook is extremely uncertain, and there is much hard work ahead for us. We believe our portfolio and our balance sheet are as well positioned for the current challenges as we can be.
We have the resources and expertise to manage through these difficult times. And we are highly focused on managing each loan to minimize the risk of default and should that to occur to maximize our recovery.
We take our responsibility to our shareholders, our companies and our lenders incredibly seriously and we are focused on taking the necessary steps each day to live up to the trust you have placed in us. We look forward to keeping you apprised of our progress.
Thank you for joining us today and on behalf of the entire Owl Rock team. We hope each of you and your families remain safe and well.
Operator, please open the line for questions.
Thank you. [Operator Instructions] Our first question comes from Casey Alexander from Compass Point.
Hi good morning and certainly hope that everybody is doing well. I have a couple questions. And then I will jump back in the queue and circle around at the end, if necessary. First of all, I think shareholders really appreciate the aggressive nature with which the share repurchase program operated. I mean, we knew that it had been announced at the IPO. But nobody was really certain until it came into practice, how aggressively it might operate, depending upon the environment with only $27 million or $28 million left on it. It is likely to be used fairly soon. What is the appetite to reload at the management and board level?
Sure Casey thank you. We got a lot of questions on the share buyback during this period of time. It should have been that uncertain because as we had said at the time of the IPO, this was a programmatic buyback, that was taking place as long as the stock traded a penny below NAV.
We didn’t disclose the amount, but, it was very clear from our disclosure that any day that the shares are trading a penny below NAV that the buyback would be in place. So there was nothing aggressive or not aggressive about it, it was just mathematical based on shares that were trading on days that the stock was trading a penny below NAV.
As you know, most of this period of time since our IPO, that has not been the case, but with the recent market disruption it probably been the case. And so the buyback has been operational. We haven’t disclosed the formula, but I can share that the program, the regulatory program that it operates under has a cap on any given day of 25%.
So that can’t be above that. We haven’t disclosed the exact percentage but you can do some math around the 25% and can’t be above that. So, that is a little bit of the context around it. In terms of the going forward, as I indicated in our call, our focus right now is on being defensive of the portfolio and preserving our liquidity for protecting our existing investments.
We think the most important thing we can do for our shareholders is getting back par on all of our investments and our dry powder and the capital we have for that is critical to that because we may need to provide liquidity for these companies to ultimately improve our prospects or getting back par. So that is really our goal.
Over time, to the extent that the programmatic buyback runs out, we would certainly engage in a discussion with the board and about whether we should do a different type of program. The programmatic program was really put in place on the context of the IPO and trying to make sure the IPO was successful.
We may consider that or others but I would say it is not a big focus for us right now. And I would not want to set expectations that you should expect to see an additional buyback program put in place in the near-term. So, that is as best I can give you color on it right now.
Okay, thank you. That is very fair. And then secondly, as I kind of work through the math, where rates have gone, which is sort of been an anticipatable, and the likelihood that, at least for a while here, we are in an environment where there is not a lot of deal activity and making deployments at the rate that you had in the past might be somewhat difficult.
You kind of run through the math, and it could be that when the management and fee waivers run out, having net investment income that exceeds the base dividend could be challenged by a penny or two or three. Would the company consider partial incentive fee waivers to make sure that NII covers the base dividend if that event where to evangelize?
Sure. So when I come back to the guts of your question in a second, but I think we can all agree that the most important thing we can do for our shareholders right now is making sure that we get back par on our loans.
We obviously have experienced a reduction in NAV which was primarily driven by spreads widening. Spreads have now tightened since the end of the quarter. If that sustains we hope that NAV will go up.
The markets obviously, based on taking in an expectation of loss, our goal is to avoid those losses and experience and get our stock back to back to NAV. And in the short-term our focus is on that.
But you are right longer term, assuming we do a great job on that, assuming rates stay low, looking out, past some pretty unclear and uncertain terrain on you make a fair point, where LIBOR is on sustainability of dividend.
We think, we have a number of levers to address, our ability to cover our dividends. We -- first and foremost, we think, we are going to have the opportunity to improve spread in our portfolio. I would say that comes from two factors. One, as I highlighted in my prepared remarks.
We have a significant amount of loans on our books that are sub L plus 500 that was very deliberate on our part as we assembled the portfolio to do that in a very conservative manner. As those companies get a retailer loans, which will happen overtime, we can redeploy that capital and markets spreads that will be an excess of that so they will plus 500.
In addition in this environment, we think we are going to have opportunities once we have more confidence in the point capital to get meaningfully increased spreads LIV on covenant packages on new loans.
As I tried to make the distinction in my remarks, I think new deal activity, new buyouts by sponsors are remain modest. But, we are getting calls all the time right now from sponsors asking us to finance their existing portfolio companies, who have liquidity needs and they would like companies would like to be able to boost their liquidity and frankly that many of their incumbent lenders are not in a position to provide that liquidity.
We are, we can provide that liquidity and frankly the terms that are out there that we can get are very attractive. We are just choosing not to do so because we want to save our power at this moment in time.
But over at some point when we get more visibility, we will be able to take advantage of those opportunities and that is another way that we can improve our returns and improve our ability to cover our dividend.
Last two pieces I would highlight. Modest increase in leverage were obviously well below even or previously targeted leverage. From we get approval to go to the two times. We will have the ability to increase our leverage over time a bit higher. That will also increase our dividend coverage and prepayment fees.
We have had really modest prepayment fees in the context of a portfolio of our size given the relative use of our platform. At some point that is going to pick up and that will generate net income for us that will help. So you think we have a number of levers, in the short-term, it is about defense but overtime we can pull those levers and comfortably cover our dividend.
Alright, that is really helpful color. I will step back and let others ask questions and if I have more I will come in at the end. Thank you very much.
Thank you. Our next question comes from Ryan Lynch from KBW. Please go ahead. Your line is open.
Hey, good morning. Thanks for taking my questions and hope you all are doing well. Just wondering to get some commentary on, you spoke about your guys focus right now is to focus on your existing portfolio companies. But you guys do plan on selectively making you in the market and you talked about your leverage going up modestly kind of by this year.
Just wondering, you also said in your prepared remarks that, it is really not possible to tell how long this unprecedented economic downturn will last. So when you guys are evaluating new opportunities, what are the criteria that you guys are using? And the companies that you guys are focusing on to actually deploy new capital in an economic environment that just has such great uncertainty?
Sure. Ryan. So as I said, our bar is very high. And that is driven by, we just don’t know how long this is going to last and we don’t know what the needs are going to be for existing portfolio companies. And we think that it is prudent to really use our dry powder to the extent that those companies are going to need it because we want to try to make sure we get back par.
We will do new deals, they will be pretty limited, the bar will be very high, what is the criteria? But I think first and foremost, it is about credit selection. And I think that in this environment that is very difficult given the lack of visibility on when the medical environment will improve when the economy will start to improve.
There are sectors where you can gain confidence to underwrite despite the current environment. We have highlighted, some of the sectors that were larger than are the kinds of sectors that we could consider underwriting software happens to be one.
We think software will hold up well, in this environment, insurance is another, food and beverage is another, the sectors that were largely. Generally our sectors that have reasonable visibility even in this environment.
So if we see opportunities in those spaces where we feel confident in the ability to underwrite the loan, and we have economics and feature economic features and the equity questions that we like, we can consider doing that and we will do it.
But I think it will be a pretty limited number until we get greater confidence on the broader needs for the portfolio. we just need to weigh every new deal opportunity against, what that liquidity may be used for down the line in some of our existing companies.
So you should expect to see us do a limited number. We can do a couple add-ons to existing businesses. But I think it is going to be modest until we can more conviction.
Okay. if I look at your unfunded commitments speaking of existing companies. When your unfunded commitments have a pretty good mix of secured revolving, as well as delayed draw term loans. Can you talk about, are there any specific provisions in there regarding that delay, draw term loans that only make them accessible for certain reasons like acquisition or M&A or those free to be accessed by the portfolio companies that will?
Yes, they do. Typically, the way draw term loans have are tied to typically use the proceeds related to an acquisition. In addition, they may have other financial tests, such as a leverage test or other credit metrics that needs to be met for them to be drawn.
So that is typically the case that is not the case in every situation. But if those conditions are met, then we can we will fund the draw. I would say, in this environment, the sponsors, I think, are being very cautious about doing additional acquisitions at their portfolio companies for obvious reasons.
And so I think they will have the same caution that we will about whether they will be trying to trying to grow through acquisition right now given their own concerns about visibility into companies. But there may be some and maybe we stand ready to meet our obligations under those. It is not a massive number in the context of our overall portfolio, but as we as needed will provide them.
They also are time based unlike the revolvers, the revolvers are typically five, six years. The delay draws are at a time based limit on typically a year or less, sometimes as long as two years. So, overtime over the next year or two, they will all go off if they are not used. They just go away, unlike the revolvers, where they can be drawn and repaid overtime the delayed draw at just go away.
And Ryan, I guess what I would add to that is about two-thirds, as I mentioned of our undrawn are in delayed draw term loans. And we do disclose all of our unfunded commitments, we don’t just disclose the ones that we are required to fund immediately. So you see the full population there.
Okay, got it. And you mentioned, that two companies this quarter you guys switch their interest payments to pick. What were those two companies, I have had a chance to define them in your schedule investments, number one. And then what was default with switching those to take obviously that that is you do that in order to preserve cash and liquidity and get that that company better runway to navigate this unprecedented environment, but what was the thought process behind also keeping those on a cool status that obviously if you are going to record that as income that you have that kind of speaks to you guys thought behind your ability to eventually collect data just giving you an economic environment where and it seems so uncertain. Can you just talk about why yourself as switches to take that also keep them on a cruel?
Sure it is a good and fair question. If you look for you will see there were two - one was a very small amount for a company that shows up on our STS, CM 7 restaurant. It does business under [Metra] (ph), it is a restaurant, it is a KFC franchisee, it is a less than $40 million investment.
So it is very small. And so the other one is a company called STS which we approve post quarter end. So I’m not positive that shows up in the schedule of investments. But that is the other one I’m referring to. STS is in the aerospace space. And that is a bigger investment is closer to $200 million.
We go through all our names and determine nonaccrual or not based on our expectation of collecting interest or expectation of collecting principal, you are right to asked the question, we obviously went through that analysis on these couple names, as well as, all our names but certainly the ones that or have lower valuations. And we have determined and in consultation with our auditors determined that we expect to get our interest payments and interest over time and we expect to get our principal back at par.
So we, in the short-term I thought it was prudent a lot of company having additional liquidity, but we believe that we would, we expect to get back par on our investments and therefore and back our interest and therefore it is appropriate to keep them current.
Obviously, liquidity in the short-term is measured in millions of dollars and recovery is measured by enterprise value and certainly in situations where companies have limited short-term liquidity but have lots of enterprise value and therefore we thought was appropriate to keep them current.
Okay, thanks for taking my questions. Hope you guys all stay safe and I’m going to hop back into queue.
Great. Thank you.
Thanks Ryan here as well.
Thank you. Our next question comes from Mickey Schleien from Ladenburg. Please go ahead your line is open.
Yes good morning everyone. Just a couple of questions. I have seen some reports that Owl Rock Partners, in other words the platform is looking to raise $1.5 billion optimistic debt fund to invest in small and medium sized companies looking to help bridge their liquidity gaps.
It sounds like from your previous comments that the BDC won’t co-invest with such a fund but I’m interested in understanding what sort of structures those investments could take in today’s market? And could that turn into deal flow for the BDC down the road when things normalize?
Sure. So look, we are really here focused on ORCC. As you know, we manage four funds on not just ORCC and so it is really not the place to talk about other funds that we may manage. We have since inception, we have opportunities where multiple funds can invest in the same deal if the deal is appropriate for those funds.
It has to meet the investment criteria for the specific portfolio. That is something we have done since inception. I think it is an advantage for us and our platform to be able to offer that out. But we are very careful about making sure each investment is appropriate for that specific fund.
So to the extent we had other funds and they had deal flow that was appropriate for ORCC just as we have had in the past, we would operate as we have in the past but the strategy for ORCC remains the same.
High quality upper middle market sponsor-backed well-performing businesses. And regardless of any other strategies that Owl Rock pursues other funds that strategy is not going to change.
Okay. I understand. And one housekeeping question, I apologize. You may have already mentioned in the prepared remarks. What is the portfolios average LIBOR floor.
Hey Mickey it is Alan. In the case on the left side of the balance sheet, it is an 86 basis point average weighted LIBOR
Okay. Thank you for that, Alan. Those are all my questions.
Thank you. And our next question comes from Robert Dodd from Raymond James. Your line is open.
Hi guys yes and hope everybody is being okay. A couple if I can I mean , obviously comments about a higher bar to do incremental but to take on new investments at this point in the cycle makes a lot of sense. How does that mesh with the fact that as a platform, I mean everything happened so fast, the platform had made certain commitments and obviously ORCC implicit within that certain commitments on transactions before these, latest events.
So, are those being reevaluated in the context of the market spreads of obviously widened for new investments today? Or how does that fit with your view, obviously certainty of close to amendments already made versus the color you just gave in terms of being very, very hesitant about making new investments right now.
Look it is just not a big thing. It is not a big factor for us to have spent a lot of time on. I mean, obviously if we make a contractual commitments any borrower, we are going to live by that commitment regardless of the change, economic environment, our commitments don’t allow for us to change our mind based on the economic environment.
Having said that, it is a, I don’t want to - it is a really low amount of number of deals and dollars and just not consequential to really, engage in the discussion. We are not sitting - our first quarter was a relatively modest amount of deal flow given the slowdown in sponsor activity.
That activity only slowed down during the quarter, and as only slowed further in the beginning of the second quarter. So there is not a large pipeline of deals that we have committed to that we haven’t yet closed on. And so I wouldn’t have any great concern over that.
Got it. Thank you. And then the conversations you are having with companies sponsors on a weekly, daily, can you give us any kind of how much it is a feedback you are getting from them is say qualitative versus quantitative? I mean, I can get the feel wet where a company can say things. Okay, but are you actually receiving in recent periods customer renewal rates?
Are your cash flow numbers that are very, very up to date? Or is it more of a quantitative, sorry, qualitative discussion that the, it is been the focus from the feedback you have been getting recently?
Sure. Look, this is I think one of the big advantages of direct lending versus the public markets. I mean, we get a much heightened level of information versus what is available in the public markets in order to change get to know the companies extremely well.
And beyond any required financial information, I would say most of our borrowers, most of our sponsors want to make sure that the lenders are well informed and provide us with lots of information in quantitative and qualitative.
It varies by company, but in specially at times in stress, I think that the companies, you want to make sure that lenders are well informed, we have covenants in our documents, the vast majority of our personal terminals have covenants.
And so the companies recognize that in this environment, they may be popping into those covenants at some point in the future. And they recognize that they owe it to their lenders to make sure we are well informed and what the prospects are for popping those covenants and share that level of information.
So our teams are doing a great job of getting that information, obviously, you want to make sure you don’t lose the forest for the trees and you are getting daily financial information, isn’t going to necessarily improve your decision making, but I would say we get a good quantitative sense of what is happening on the ground with the outlook will be and we feel very well informed, not every single company but I would say the picture is we feel very well informed on what is going on with our businesses.
Okay, I appreciate that.
And our next question comes from Kenneth Lee from RBC Capital Markets. Please go head. Your line is open.
Hi good morning and thanks for taking my question. Just wondering, if you could frame the potential expansion for net interest margins. Just given where LIBOR currently is sitting at? Thanks.
Ken, you are asking about like spread or are you asking about pennies per share?
Ideally, pennies per share, or even spread would be fine.
I mean, look directionally, we think that and again, this is really directional and there is not a precise analysis around this. But we think that just by our improved spreads in the current market environment by replacing lower spread loans as they roll off at higher spread zones. We can easily add a couple pennies per share to our net income per share per quarter.
The only thing I would add to that is if you are looking at to crunch numbers can be interest sensitivity table in the back of our queue and back to the MD&A might be something you are looking for. But happy to take that up more offline.
Great. And just one follow-up, if I may. Just in terms of - I know there is been ongoing efforts of in diversifying the funding mix and just wondering, if you could comment on whether we could see a potential change in either the pace of the efforts given the kind of environment or whether there is any potential change in plans?
Generally speaking no, no change in plans. It is obviously more challenging environments to go out and raise debt, but we continue dialogues with our lenders. Our mix is not going to change. If anything you certainly can continue to see a lot more unsecured in the future as we have telegraphed on prior calls. But no, nothing generates change there.
Great. Thank you very much and hope everyone stay safe.
You as well Ken. Thank you.
Thank you. Our next question comes from George Bahamondes from Deutsche Bank. Please go head. Your line is open.
Good morning everyone, hope you are well. Thank you for taking my questions. I’m wondering if you can give us a sense for the number of hours who reached out for relief or just to engage in conversations around loan modifications in the first quarter?
To give you a sense, look I can give you some metrics. We had less than 10 amendments for the quarter and less than half of those were for material amendments. There were a number of borrowers that I would say engaged in discussions that, didn’t result in any substantial amendments.
But, that number I haven’t sat back and counted up with the teams we are always having kind of informal conversations. But in terms of like substantive amendments, less than 10 and less than half of those were meaningful amendments. The others were more technical in nature.
There is probably another 10 to 20 on top of that, that had informal discussions that didn’t result in anything. Obviously, that number is going to pick up materially in the second quarter. But in terms of what happened in the first quarter, it is fairly modest in the context of 110 portfolio.
Thank you for that color. I guess just my next question is how you seen that number maybe evolved through April and the beginning of May, have you seen a noticeable difference? I would imagine it would pick up so we are wondering if you can share any color there as well?
I don’t think I could really define a difference between what happens in the last couple of weeks in March versus the patient, what the most recent couple of weeks. I would say there is a steady stream of conversations.
Obviously, our companies generally report compliance with covenants on a quarterly basis. And so at the end of, as companies look out to where they expect the quarter to come in, that is when those conversations ramp up to the extent they think there is going to be an issue. So, I would expect it to be -.
Okay. I think this isn’t specific ORCC. Any direct lender is going to spend a lot of time in the second quarter talking to their borrowers about how they are doing compliance with covenants? I have tried to be very forthright about addressing areas of concern, I just want to make sure I’m giving you the proper picture.
We have a lot of companies who are actually doing just fine in this environment, and that aren’t engaging us with covenant requests, and think they have plenty of liquidity. And we were staying on top of them, but I would say there are many companies that we don’t expect to have any amendments at all.
It is hard to predict, because the environment is just unpredictable, and we are prepared for whatever comes our way. But I think that our greatest intensity is going to be focused on those three and four rated names, those sectors that I have highlighted that are going to be a greater concern. And it is a relatively limited number in our portfolio on 12% at this point. But if conditions continue to be weak, there is a chance that number increases from there.
So just having an amendment is not a daunting proposition that is why we have maintenance covenants just to have that seat at the table to work through it with the companies. And I don’t think the number of amendments is in and of itself is going to be necessarily an indicator of risk of loss for us. And that is why we haven’t had covenant packages, but it is going to be an indicator that you have a seat at the table and we are focused on preserving the value of our loans.
Great. And I appreciate the color today and that is all for me.
Great. Thank you.
Thank you George.
Thank you. Our next question comes from Finian O’Shea from Wells Fargo Securities. Your line is open.
Hi, hope everyone is well, thanks for taking my questions. First of all I want to follow on, I think what Robert touched on earlier on commitments, looking at a loan [indiscernible], it lists you as leading the $440 million loan subject to close upon the completion of the debt marketing period. Can you provide context on what that means for your commitment to the deal? Was there any flex language in this one off? Or did you not commit to the whole transfer perhaps any context would be helpful.
Thanks, Fin. [indiscernible] is a public company, I’m not in a position to make any comment whatsoever on that.
Okay. I understand. And I guess a little higher level than, you talked a bit about rotating out of lower spread loans L plus 500, I think was the number you threw out. I’m looking at one of your larger investments this quarter. KS Management was L 425. So in that context, how much incremental spread do you anticipate being able to take on? And what should, we think about the risk and return for that specific credits?
Yes, it is a fair question. In the context of the comments I made. That particular transaction was a deal that we had committed to a fair bit ago. I don’t remember, but it was months ago. And so you are right that is my comments about increasing spread or not consistent with closing on that deal.
But that deal was committed to last year, I don’t remember off the top of my headwind, but months ago in sitting here right now, I don’t think you’ll expect to see us do new, KS Management type fields at that spread.
At the time we committed, we thought it was a very attractive deal, very high quality healthcare provider. And so we did it then, but I think given how the portfolio has evolved, I wouldn’t expect you to do other deals in that spread range in this environment.
So where would we, I guess maybe the question, where would we deploy capital? I think that we unitranche pricing today is substantially higher than L plus 600, let’s call it L plus 650 to 750 that type of spread range. So that is gives you a sense of where that piece of the marketplace is. We won’t do too much. You shouldn’t expect to see us do anything meaningful so the L plus 500.
Thank you Craig.
Thank you. And our next question for today comes from Chris York from JMP Securities. Please go ahead . Your line is open
Good morning guys, thanks for taking my question, obviously a lot discussed so I do just have one question. Craig, in the experiment healthy relationships are key to achieving good outcomes for the partners. But they can also be tested from competing interests during stress.
So the question for you is, are you thinking about the need to protect your par value by enforcing your rights as a lead lender today with performance materials versus the risk of impairing the trajectory of Owl Rock’s franchise value, or market share you’ve created over the last five years?
Sure Chris. Again fair question. Our role and our job is to protect the value of our investments and our shareholders capital. Now, we appreciate this, why you are asking the question, because we have built our business around being a partner for private equity firms.
We have very deliberately built that business by having a large pool of capital, a very large team, and a broad set of relationships and you can go through our portfolios and you can see we finance for lots of different sponsors. We are not dependent on any one, two or three and we cover hundreds of private equity firms.
And I think we have done a nice job and I know the private equity firms would agree of becoming a valued partner to the private equity firms. We are going to approach our, this period of time and is as constructive as we can be.
We are certainly, we think constructive means listening to the sponsors being rational about what we are being asked to do. But make no mistake, our job is to protect our loans. And I think that private equity firms are fiduciaries of capital work fiduciary capital.
Any sophisticated private equity firm that raises institutional capital understands the difference of where we sit in the capital structure and what that means for us? And I believe I’m very close, my partners are close to folks running private equity firms. They understand that difference.
So we think we can do both. We think we can protect our investors and maintain our franchise as being preferred partner, to private equity firms, and for the solutions that we can provide. I don’t think it is an either or inevitably there is going to be may be situations where we need to take action and there may be a frustration level of one particular private equity firm for that action.
But I think when they take a step back and they will understand it and in the context of a big, broad platform, we can afford to have some unhappy, specific situations and still have a great business on our hands.
So, our teams are prepared for that and I think the sponsors understand that that is as part of this environment. However, just to leave on a positive note, I think the tone of the conversations with sponsors have been very constructive.
The sponsors have significant capital in these businesses, they have a dip significant dry powder, and they want to protect the businesses and help the companies and make sure they have enough to get through this period of time and a sponsor stand ready to do that provide additional capital.
We stand ready to work with them and help businesses get through it and get back our investment and have the sponsors on a nice return on their equity. So I don’t think it is mutually exclusive and I would say the tone that we have heard in the last four, six weeks has been very constructive and I’m optimistic that we will all work through this together.
Great that is very helpful color inside out. One follow-up. I know you guys have been building out portfolio management resources at the platform over the last year. So I’m curious many dedicated investment professionals, does investors have to support the platform’s restructure or portfolio management expertise? And then what is that maybe year-over-year?
Sure, look, I think like most direct lenders, in this environment, in my comments about new investments, the entire investment team is essentially focused on portfolio management. So it is not - the resources we have right now are significant. There is, there are a handful of folks whose job it is day-to-day to work through specific portfolio management issues.
As I mentioned in my comments, we have taken additional folks who were investment professionals but essentially, we said put that aside and just become additional resources and we will continue to add to those overtime, but it is we have plenty of resources. And we will continue to add not so much about the number of people but adding a couple that have, some very specific technical experience that might benefit us in this period of time.
Sure, it make sense. That is it from me. Thanks Craig.
Thank you. And at this time I would like to turn the call back to Craig Packer for closing remarks.
Okay. Well, look, thanks everyone for your time. I know this went a little longer than our typical calls. We really tried to share as much information as we could about what we are seeing and talk about the future in this uncertain time.
I appreciate the questions. We are obviously available for follow-ups. Really sincerely wish everyone on the call on good health for you and your families and look forward to coming back and updating you on our progress in the future.
Thank you for joining us today ladies and gentlemen. We appreciate your participation. This concludes our call. You may now disconnect.