Ares Capital Corporation (NASDAQ:ARCC) RBC Capital Markets Global Financial Institutions Conference Call March 9, 2021 4:00 PM ET
Company Participants
Tanner Powell - President and Chief Investment Officer, Apollo Investment Corporation
Kipp deVeer - Director and Chief Executive Officer
Daniel Pietrzak - Co-President and Chief Investment Officer, FS KKR Capital Corporation
Josh Easterly - Chairman, Chief Executive Officer and Co-Chief Investment Officer, Sixth Street Specialty Lending
Conference Call Participants
Kenneth Lee - RBC Capital Markets
Kenneth Lee
Hi, good afternoon, everyone and welcome to the RBC Capital Markets Global Financial Institutions Conference. My name is Kenneth Lee, and I am the senior equity analyst with the firm covering the business development company sector. And welcome to our industry panel, In Conversation with Leading BDCs. And I am very pleased to be joined by our panelists today.
We have with us over the phone line, Tanner Powell, President and CIO of Apollo Investment Corporation. Mr. Powell was appointed President in 2018 and has been the CIO since 2016. Mr. Powell joined Apollo in 2006 and is a partner and portfolio manager in the Apollo Global Management’s direct origination business. Next, we have Kipp deVeer, Director and CEO of Ares Capital Corporation. Mr. deVeer joined Ares in 2004 and also serves as a director and partner of Ares Management Corporation and is the Head of the Ares Credit Group. Next, we have Daniel Pietrzak, Co-President and CIO of FS KKR Capital Corporation. Mr. Pietrzak is also a member of KKR and the Co-Head of Private Credit and a Portfolio Manager for KKR’s private credit funds and portfolios. Finally, we have Josh Easterly, Chairman, CEO and Co-CIO of Sixth Street Specialty Lending. Mr. Easterly was appointed CEO in 2018, served as the Co-Chief Executive Officer from 2013 through 2018 and was elected a Director and Chairman of the company in 2011. Welcome, everyone.
Before we dive in, perhaps each of you could give a brief overview of your company. We will start with you, Tanner.
Tanner Powell
Yes, thanks Ken and thanks everyone for joining. Apologies, I am not technologically savvy enough to get this webcast to work. So I apologize for that. As Ken alluded to, I am President and CIO of Apollo Investment Corporation, ticker AINV. We are a BDC, founded in 2004, as the name would imply, we are affiliated with Apollo Global Management, large alternative asset manager with about $450 billion of assets across private equity, credit and real assets. Our BDC is 2.5 billion of assets across 147 companies and our BDC sits within our direct origination business, which is about a $30 billion business at Apollo and benefits from 135 investment professionals that focus on the strategy and importantly, of which about 60 have origination responsibilities.
Our strategy is one very much focused on first lien floating rate assets, low loss given default, majority of our assets come from sponsor lending, but that broader direct origination platform also has specialties in a number of other first lien asset classes such as ABL, life sciences, which we benefit flow from. An important piece of our story is exemptive relief. As I mentioned, we are part of the broader direct origination platform and with the benefit of exemptive relief, we can invest alongside that platform and benefit from the sourcing of the broader Apollo platform. Thanks. And I will turn it back to Ken.
Kenneth Lee
Great. Why don’t we go with Kipp next, followed by Daniel and then finish off with Josh. Thanks.
Kipp deVeer
Good. Thanks, Ken. Appreciate you guys having me. So yes, my name is Kipp deVeer, I am a partner at Ares Management. Like Apollo, you know our BDC Ares Capital where I am the CEO today is externally managed by a large and growing global alternatives firm. Ares Capital really has been the flagship and first fund in our U.S. direct lending franchise, which today is about $45 billion of assets under management. By way of background, I have been with the company since its inception in 2004. Our company has grown substantially. Today, we have roughly $15 billion of assets under management in Ares Capital, with roughly 150 dedicated investment professionals engaged to Tanner’s introduction in a wide variety of different direct origination activities for the benefit of the shareholders. So, certainly have a business calling on private equity firms and financing traditional leveraged buyouts, but we have increasingly over the last many years diversified the business, to have direct to company origination to have some industry verticals that we think benefit our BDC in particular and certainly as the Ares platform has grown, our BDC continues to take all of the advantages of a large global credit, private equity and real estate managers. So, happy to be here. And I will hand it over to Dan.
Daniel Pietrzak
Thank you, Kipp and Ken, thank you for having us here today. This is Dan Pietrzak, as Ken mentioned, Co-President and CIO of the FS KKR BDC platform. We manage two public BDCs one trades under the stock symbol FSK, the other under the stock symbol FSKR. On a combined basis, you are roughly $16 billion of assets. You will hear some common themes here, obviously externally managed by the FS/KKR Advisor, which is a partnership with FS Investments, a Philadelphia-based firm. That said, the BDCs benefit from having exemptive relief across the entire KKR platform. We think that is a good view of the overall firm is roughly $230 billion of AUM. The private credit business that I look after is roughly 25, but that benefit we think is real. Our focus has been on the upper end of the middle-market. So, think of our companies with $50 million to $100 million of EBITDA, like Tanner, like Kipp though we are very focused on building out the origination channels to do more than just sponsor finance. We think that’s important in the market that we are in today. But mindful of time, Ken, I will pass it over to Josh.
Josh Easterly
Great. Thanks, Dan and Ken thanks for having me here today. Sixth Street Specialty Lending is advised by Sixth Street, which is a $50 billion alternative asset manager focused predominantly in credit, in private credit, but does stuff across the capital structure. The BDC has approximately $2.2 billion of assets under management assets and we are focused on sponsor and non-sponsor, and we have 140 investment professionals across the business, predominantly focused in verticals and try to provide solutions to companies. But again, thanks for being – thanks for allowing me to be here and you put together a great group of panelists.
Question-and-Answer Session
Q - Kenneth Lee
Great. Welcome, everyone and thanks again. We are going to keep this discussion relatively interactive. And for those of you who are participating on our webcast, you may submit questions at anytime and we will try to address them throughout the session. So, let’s kick it off, then. Let’s start off broadly. Now, each of your companies have very diversified portfolios of debt investments in middle-market companies in the U.S., what are you seeing from your companies? And from that, where do you think the health of your portfolios, are telling you where we are in the economic recovery and somewhat relatedly, what industries and sectors is the panel seeing that’s the best relative value for deploying capital given the ongoing recovery? Why don’t we just start off with you, Kipp for this one? Thanks.
Kipp deVeer
Sure. I think, we are seeing very, very frothy public market behavior and enthusiasm, right, surrounding us in the private markets. But what Ares does pretty much through and through is invest in private companies across a whole host of different sectors both public and private credit. Look, I mean, I think it’s our view that about 85% or so of our portfolio, which has been – had been defensively positioned going into COVID, thankfully, is doing great actually and feels at or above plan, which I will say, it’s not surprising, but it gives me optimism around 2021 and beyond. As we have talked about the BDCs specifically, we have always tried to orient the portfolio towards these defensive industries. But I think to use the Dan Pietrzak quote from earlier in the year, we were underwriting to a recession, not a pandemic. So we have some companies that are experiencing some hardships that we wouldn’t have expected, right and they tend to be what I think of is very stable businesses that obviously require attendance to generate the revenue and I could give you some examples and anecdotes that people might find amusing. But overall, we are finding our portfolio is recovering well in terms of the names that were impacted, but I think that’s really testament to having a large team that I think has really distinct asset management skills, i.e., we have done this before, we have managed through downturns, we figured out how to get companies not doing as well as they might have expected to the other side. And that entails everything from doing amendments and providing lender concessions to encouraging owners to support companies with businesses to even on a worst case circumstance already, we have had a few where you have had to go back in and restructure balance sheets and own businesses. But I think we know how to do that and we are feeling like 2021 should be a better year to allow us to do that. Most importantly, we are not seeing any new issues in the portfolio, right. So everything that happened really it’s for us happened back in March and April, right with business closures watching some of those businesses that we never expected would close, close reemerge isn’t that surprising? The ones that we have the concerns about and maybe make the hardest for new investing are really COVID impacted names, things in travel and hospitality, in events and stadium management, which are some places where we have a little bit of exposure. We think that it maybe a while before that comes back. But new deal activity is pretty good. I’d say it’s centered around healthy companies and around non-COVID impacted industries for the most part, because I think most of us at least I will speak for myself, but I remember most of us on the panel just see that as a less predictable recovery now, right, much harder to underwrite the pace and the V shape or the U shape or whatever shape it maybe to the recovery in those industries.
Kenneth Lee
Okay. If there is no other comments we could certainly move on to the next topic. For the next question, I am wondering if the panel can comment on how market volatility and then the accelerated pace of M&A activity seen in the latter part of last year has impacted competitive dynamics? And stepping back, wondering how would you frame the overall competitive landscape right now? Tanner, how about we start this one with you?
Tanner Powell
Yes, sure. Thanks, Ken. I think your question trying to frame it the right way. So, you saw not surprisingly a considerable amount of volatility in the wake of COVID and that really sidelined M&A and then things start to come back in Q4. As much as it was a sequential increase, it was actually still down quarter-over-quarter. And so I don’t think that – so I think that’s interesting in its own right, but I don’t think that, that was necessarily what drove the competitive dynamics and right now, where we sit is a very competitive market, private debt more broadly or whatever moniker you ascribed to private markets was pretty darn competitive before COVID. And I think with the recovery and underlying fundamental performance, at BDCs and then also the dry powder has left us in still a competitive position. I think what’s interesting on the M&A point though, perhaps not so surprisingly, there was a positive selection bias. And so what the options that we have seen have been in some cases, COVID beneficiaries, but certainly not those that are – have been materially effective and so from a risk underwriting standpoint, have been the type of names that participants have been pretty constructive on. And we have seen terms on top of what we saw pre-COVID, one notable difference is I think we and the collective market having grappled with excess draws on revolvers. We thought critically about terms like anti-cash hoarding and the size of those types of commitments, but by and large, a very competitive market, all told. Additionally, in some ways, affecting that competitive dynamic is also the syndicated markets. Kipp alluded broadly to froth in public markets, which goes to a lot of places, but one dynamic that has crowded out some opportunity or influenced terms that we are able to drive and command in the private debt market, particularly at the upper end of the middle-market has been the extent to which the syndicated markets have reopened and the flexibility for smaller borrowers relative like as that syndicated market shows willingness to do deals with $50 million of EBITDA that on the margin will affect and perhaps exacerbate some of those competitive dynamics. So, broadly speaking, pretty competitive market, I would expect, not just COVID, those sectors that avoided COVID downturns and see an acceleration of M&A and we remain long-term bullish on private debt and particularly for larger platforms that can bring to bear that level of origination across a number of different verticals and asset types. So maybe I will pause there and open it up to other panelists or kick it back to you, Ken.
Kipp deVeer
Yes, I am happy to add one comment, Ken, I think we are observing, which is and we have described it – excuse me, in this regard in the past, the higher quality platforms and leaders in the space tend to figure out a way to sort of consolidate market share during downturns, right, credits inherently kind of a cyclical business. So, if you play it counter-cyclically and then you invest when others are not investing and then you are more cautious when it gets frothy, you tend to do better in our experience. So, one of the nice things that’s happened to us over the last 12 months as I think a lot of the private equity firms, borrowers, bankers, whoever it maybe, have observed which companies have been healthy and it’s been open for business the entire while and have actually treated their portfolio companies well even if it was during difficult times. And it’s those types of situations that actually really reaffirms, why would you partner within Ares, right. And I think some of the other panelists here have probably shared some of those experiences. But for us coming out, we feel that we have got a stronger business where our partners view us as more reliable and each dislocation or downturn that you are able to live through is sort of earn some additional credibility and I think have the ability to grow with that in a way that many others may not.
Josh Easterly
I would agree with that. I think like maybe those are two different ones in some ways and there was a lot of stress in the system. I am sure we will talk about that later, right. But I do think what happened over Q1 Q2 was probably a decent test for this market, right. I mean, Tanner has sort of alluded to revolvers, that’s been maybe a new spot of the private debt space, term loans where people are able to manage through those, right. Go back to your initial question on competitive environment, I mean, my sense is, it’s always competitive, right. You have different sort of levels of that, I mean, obviously, people were overly cautious and only doing very select deals. I still feel like we are seeing quite ample sort of pipeline opportunities. I think the syndicated market point that Kipp alluded to is not a great fact, right. I mean, I am not sure that we are all competing out there against that day-to-day as we are trying to provide a different alternative, but the froth of the sentiment in that market does spill into this market, which isn’t great.
Kenneth Lee
That’s very helpful color. So, moving on to the next topic, several of you on the panel have noted on recent earnings calls seeing a pickup in activity from financial sponsors over the past few months and certainly the fourth quarter looked like a very active quarter in terms of originations broadly. Could you talk about what you saw in the quarter? And given the trend that you saw in the fourth quarter and a pickup in the sponsor activity, how does the outlook for capital deployment and originations look for this year? Let’s start this one with you, Dan.
Daniel Pietrzak
Yes, sure happy to. I mean, yes, I think Q4 was a good quarter on the origination side. I think our BDC platform did almost $2 billion, which is a strong number. I think that’s probably consistent across the folks on the line here. I think there is a couple of things though, right, you had some pent-up almost supply of deals, so options they got pulled, I think Q2 and Q3 was probably light for most in many ways. So, I think that did play a factor. I think Q4 was always a busy quarter. People are trying to get deals done before year end. So, I think that also sort of plays into it, but activity level I think we are very happy to see. I think when you take that into this year, Kipp sort of touched on his portfolio, I think we feel the same. The overall portfolio feels pretty good. The numbers coming out of companies are pretty good. I think we are quite positive in the macro as these vaccines come online, as we get to the other side of this. So I think that can be quite strong for an active 2021. I think we are keeping our eye on repayments. We do think that’s a normal part of these businesses. We are generally backing companies who we want to grow. They perform like they are supposed to. They might be able to access the syndicated market. So we are seeing that a bit with that froth we are seeing in that market now. And I think you couple that with Q1 probably always being a little bit of a lighter quarter as you are rebuilding the pipeline on the other side of the holidays. So I think there will be some balance to that, but again, I think we do view that as we are in the credit business, we are lending money you are supposed to get the money back, right. As companies grow that’s not necessarily a bad thing. I think we all have the origination forces to kind of new manage that or manage through that, but I will pause then.
Kenneth Lee
And now I’d open that up to any other panelists who may want to chime in?
Kipp deVeer
I think everyone is having very much the same experience. We had a crazy busy fourth quarter, January slow and then pick back up. I mean, we have had just the same experiences, Ken.
Kenneth Lee
Okay. Moving on to the next topic, given travel restrictions and social distancing, how have you changed the process of sourcing investments performing due diligence and executing on originations? And once the economy returns to normal, how much of these changes do you think could be structural and lasting? And I will start this one with you, Tanner.
Tanner Powell
Yes, sure. And actually, I will draw on something, because it’s related to what Kipp said, in terms of credit as the cyclical business and you see larger platforms able to consolidate in periods of stress or downturns and much on the basis of value act. And as important as that is, I think that to this question uniquely in the pandemic is how you manage those relationships. And one comment that deserves to be made is that it’s very hard to make new relationships in a pandemic, when you can’t meet people and you can’t get on the plane. And so I think in that sense large incumbent providers of capital are beneficiaries or at least to a certain extent as things play forward, it’s hard to believe that there isn’t some modicum of people more comfortable doing things virtually, and arguably, perhaps less of a need to touch and feel kind of those site visits, factory tours that were once maybe there is a little bit less of a need to do that, but unequivocally when people there is the relationship business, it is easier to get business done person to person, it’s easier to build relationships that part will go back to normal toward a starting set, maybe not 100%. But I think the point, yes, I am trying to convey is that it is during the pandemic those users of capital are unlikely to go with unproven and we will be leaning on their incumbent relationships, which I think ourselves and others have those represented on the platform have been beneficiaries of in the current environment.
Kenneth Lee
Okay. And I will open it up to any other panels who might want to chime in. Let’s move on to the next topic. And just given the macro backdrop, how do you think about where leverage at the BDC level could trend in the near term and what factors specifically could drive leverage either towards the upper or lower end of your targeted ranges? And for this one, let’s start with you, Josh.
Josh Easterly
Thanks, Ken. Look, I think leverage is a little bit of a pretty idiosyncratic question. So you start off with the macro environment, I think the macro is pretty good. Consumers are well positioned given the stimulus you are going to have some point of employment tailwinds. And bait, when I think about the private economy, I think about it in three sleeves, which is consumers, financials and non-financials. Financials are in good shape and non-financials, quite frankly, corporates are in pretty good shape if interest rates – [indiscernible] is pretty well. So, I think that being said, it feels like you can have a little bit of a risk on mentality and take leverage up a little bit. That being said and I think there is a couple things that people learned to the pandemic, one is, is that your long yield liquidity and so it’s hard to take leverage down. We live in a – BDCs live in a mark-to-market world on the asset side. And then the third thing is idiosyncratic kind of company specific considerations, which is how much of your balance sheet? Have you written – have you given a call option to your issuers to access and then you are fully reserving that and thinking about leverage when those call options get exercised in the form of revolvers or DDPOs and then how cyclical the exposure you are taking and what’s the effect on spread movements across your assets. So look, I think for us, it feels like we have been operating in the 0.85 to 0.95 range. It feels like we can take it up a little bit. We have had the practice and we will continue to have the practice against reserving unfunded commitments against our max kind of debt to equity in a drawdown scenario and we will continue to reserve unfunded commitments against our revolver. So, we don’t end up short capital or short liquidity. But I think from a macro perspective, I think it feels like it’s a pretty good time given the reset in the economy and consumers are in pretty good shape and corporates are in pretty good shape and financial are in pretty good shape. That being said, I think every BDC has to overlay theirs – their own specific issues regarding how they run their balance sheet.
Daniel Pietrzak
I would add to that, Josh. I think we have always talked about the target leverage of sort of 1 and 1.25. I think you got to spent a lot of time thinking about where you want to sort of be within that and Josh is right, people have written their liquidity options. We have also always taken the tact about ensuring where we are sort of fully reserved on that. I think on one hand, you could try to be at the upper end of that range when you feel good about the market and your company’s performance, etcetera that comes to drive earnings, but I think you do want to keep a certain amount of dry powder to deal without the volatility. They call all of the platforms here to have kind of broader relationships with their advisors that can sort of capitalize on that. And then maybe the only other sort of point I would add is I do think the composition of people’s capital structures can be important, right, either duration on revolvers is very helpful. You don’t want to be in the 364-day revolver, right, you want to be 3, 4, 5 years. I think people have access more and more of the unsecured bond market that provides a lot of, I think good protection, especially against mark-to-market moves. So, I would say that the – I do view the liability side of these companies very important and something that people should spend great time to focus on.
Kenneth Lee
Okay. For the panel, let’s next talk about underwriting standards. How have they been trending recently since the end of the fourth quarter? And by underwriting standards, I am referring to covenants, EBITDA add-backs, documentation, terms, how do they compare with what you saw pre-COVID as well? And for this one, I will start with you, Kipp.
Kipp deVeer
Yes, sure. Since the end of the fourth quarter, they have gotten worse. And say probably since the middle of November, they have gotten worse. I think the problem for certain folks is they were out of business for a little while. And while they were out of business, to Dan’s point about the big fourth quarter that he had or that they had at KKR, we had a huge fourth quarter too at its capital. So big that probably by the middle of November, the end of November as we started to see underwriting standards come off a bit, we actually put our foot on the brakes a little bit and said we know we are going have a great quarter based on what we have seen, there is really no reason to agreed any of those sorts of things, walk away, walk away, walk away. And what can push that back is obviously a lot of activities. So, Dan said this too, there was not a lot of activity in January, right. So the folks that haven’t been busy, we are kind of chasing things. And one of the ways you chase things it’s through looser underwriting standards, worst documentation etcetera, we are finally now February and into March starting to see enough activity that I think it’s mitigating that. But unquestionably since November, issuers are pushing lenders in ways that I would not have expected and there are some challenges day-to-day right now, I think in our markets, because there is simply not enough activity. So, the key will be again can the year deliver enough activity and I think it can to my point about optimism for 2021 and beyond to mitigate that, but look you had some folks who are out of business for a while and they are trying to catch back up and that doesn’t help. And it tends not to be any of the larger players or many of the larger players. So I think right now, we are being actually quite cautious. The only other thing I will add on to that is Dan’s point before was a good one, which is when the syndicated loan market and the high yield market get overheated, which frankly they are right now. It trickles into our market, right in terms of pricing and other things, because we obviously observe those markets to think about structure in our deals. The key is that, someone – the key is that you recognize that pattern, right. We have done this long enough to recognize what’s happening and to be able to just shift course quickly and say, we are good we will take a pause for 3 weeks and see how it goes, because you never know what’s going happen tomorrow, right. There might be a pandemic.
Kenneth Lee
Hey, Kipp. Do you – some of the attribution, I was thought and maybe it’s not true, but I felt like the pain wasn’t deep enough for people reset underwriting standards. And so in 2008, post global financial crisis, there was a lot of pain. And so people kind of reset underwriting standards and needed to, I felt like given the Fed and policymakers kind of stuck a couple of their fingers in the holes in the dam that there wasn’t this really kind of natural opportunity for the market kind of the reset underwriting standards that happen after crisis as it was a little bit of a full crisis given the amount of stimulus and Fed support. That is what it feels like to me.
Kipp deVeer
I agree. I agree with you, Josh. I think it’s so – sorry, I think it’s so important Dan jumping after me, but look, if you look back to the end of Q1 in the April and May, there are some BDCs and others that were in an extraordinary amount of pain, right, now being able to fund revolving credit facilities, trying to cancel contractual delayed draw arrangements, seeing huge write-downs in their portfolios, not having access to credit facilities, some with mark-to-market credit facilities being forced to sell assets. But Josh is right what the stimulus did for our market was it actually provided a huge lift in the reference securities that everybody uses to value their portfolios. And that took a lot of the pain away. I mean, obviously, there is a little bit of just huge pressure valve being released for the companies that weren’t so well positioned such that they were back in the market trying to compete by October, November, which is wild. That’s 6 months, right. I mean, it’s not what it was like in ‘08 and ‘09, I can assure you.
Daniel Pietrzak
I was going to say I think the pain lasted like 6 weeks. They are felt like there was a period from the middle of March through maybe the end of May, where the world was just a different place. Everything was 200 basis points wide or everything had a tremendous amount of structure around and then to Kipp’s point that the dynamics have changed. So, I don’t think we had the full reset you did past the – on the other side of the financial crisis.
Josh Easterly
Yes, I think – sorry, Dan. I think not only that like the CLO machine after ‘15/16, after that famous OPEC meeting, the CLO machines stopped for like, I think like four to six quarters. It basically stopped for two quarters in post-pandemic. I mean, it’s shocking how quickly like even compared to not the global financial crisis, but compared to the oil debacle in ‘15 and ‘16.
Daniel Pietrzak
Yes, that’s right.
Kipp deVeer
And I will make one last point, because I think it is where our heads are at around some of this, which is not every manager and not every company is the same, delivering the same assets for shareholders. And our own view is there has been quite a lot as, as Josh points out more than anybody, but he is right to do so. There has been quite a lot of dispersion in performance in the BDC space, right. And it’s true if private credit elsewhere, I think you are going to see continued dispersion of performance between the quality managers who have been through things like this before and those who happened back to the point on pattern recognition, right. And the cycles and the little blips up and down in the market are coming quicker and more frequently than they ever did. You have to be robust enough and as an origination business to see deals such that even if you are 8 weeks into a deal down to final terms and conditions, you need to be able to throw in the garbage if you can’t get the agreement that you need, because you have plenty of backlog and pipeline behind it. And there are lot of folks who don’t have that, right. And I think over the last yes, since quarter end so to get a little micro rather than macro, I think in the last 8 to 10 weeks have some people who have done deals that we chose not to do have made some mistakes.
Daniel Pietrzak
I think, this is – most of that is correct.
Kenneth Lee
Well, that was a great discussion. That was great discussion and great color from everyone. And that also segues into the next topic I was going to ask about and which areas of credit potentially seems most concerning to the panel at least at this moment, specifically, which sectors seem to be either over-levered or underperforming or stretched by some of the traditional measures, why don’t we start this one with you, Josh?
Josh Easterly
Great. Look, obviously, I mean, I think business models that have fixed costs in who are selling services in the spot market that are COVID impacted kind of are the most challenged businesses today. So they will come back, I think it’s funny when we look at our portfolio we have a lot of business services and software. And all those businesses did really well, because revenues may or may not have moved a little bit, but costs are completely variable. And people weren’t shutting off their ERP system or CRM system or a software they were eliminating seats. So look, obviously restaurants and retail and parts of real estate are challenged. And so, they are levered to how quickly things are going to come back. I don’t think they are uninvestable spaces quite frankly. We just bought legends in another part of our business, which is completely levered to people going to the Yankees and Rams and the cowboy games and stuff like that. So I think parts of those economy are completely investable and those that the worst, I think the most challenged business models are the ones who have, those type of issues and quite frankly are facing secular issues if that’s video on demand, etcetera. And so we will see how that lays out. But I don’t think I have any insight, that’s particularly different from anybody else that’s how I frame it.
Tanner Powell
I would make a small addition there and I agree wholeheartedly with what Josh said, but maybe link it back to something that Kipp said, which I think is a really important point is that it’s not just a question of the business model and what it’s going through, it’s also how our market is bidding that risk, right. And in particular, ironically now some of those that are the least impacted are those types of deals that might have been the – and now you have certain players who have been sitting on their hands for a couple of quarters and very apt to try to get a deal done. And you get kind of a least common denominator. And so I could argue and I think Josh was touching upon this a little bit, but there is definitely some great software businesses that did really, really well through the COVID crisis. And as much as they are not COVID affected, our market might be mis-pricing that risk, right, kind of too sanguine on those and you are starting to see things creep back like ARR multiples and/or very aggressive structures with respect to EBITDA add-backs. And so, I think I am absolutely agreeing with Josh from the business model fundamentals. I think the consideration is also in the context of how our competitors and how our market is valuing things and we need to be – we need to have a wide enough funnel such that we are not only beholden to those few situations where they are subject to least common denominator type risk and how it’s getting structured and/or priced.
Daniel Pietrzak
I think that point is a good one. And it leads into what Kipp said before, I mean, I think you need to be prepared in how to build out sort of origination sort of channels or sort of footprints where quite frankly, you can walk away from any deal at any sort of moment, which doesn’t make sense, right, structured into the protective, I think you do need to pick the right companies, the right industries, you probably want those sort of tailwinds. When Josh mentioned legends, we were a lender there. We liked the story. We saw when we think that we were sort of in there at kind of the right number, but I do think the biggest issue in the market in some ways might be the market itself, where valuations are and where you can get sort of pushed to in structure. But I think if your footprint from origination is right, you feel like you are seeing enough deals, you don’t feel any pressure to do anything. You have walk-away points and you put on the rescue on.
Kenneth Lee
That’s good color. That’s great color from everyone. And somewhat relatedly, I am wondering if the panelists could talk about what protections and maybe remind us what protections are in place to help mitigate potential and negative impact within your debt investment portfolios? And for this one, let’s start with you, Dan.
Daniel Pietrzak
Sure. So, when – I would think about our lending businesses, a lot of it is unitranche lending, right, then we can also do second lien, we can do some mezzanine although that’s a much smaller part of the portfolio. Yes, I mentioned to you before like we have been focused on larger companies. We do think there is a good story aligned with sort of downside protection. These larger companies probably have a better management team, better governance, less customer or supplier concentrations. Our unitranches have targeted that companies with $50 million to $100 million of EBITDA. The second liens are, let’s call it, $125 million to $150 million and I don’t think it was even more supportive would be bigger than that. So, I think first you are trying to pick some of those names. We do believe that the unitranche market is supposed to be one that has financial covenants. Those covenants are not supposed to be set, 50% wide projections with no step down. They are supposed to have a bit of teeth to them. That said, I think the definitions of how people are constructing EBITDA are very important, because if that’s not right, then that covenants doesn’t mean much, right, but because these deals are privately originated privately negotiated, I do think you are getting in that unitranche market heavy weighting towards financial covenants, which is helpful, right. You want to get back to the table. I suspect most of us are. You are the leader, the sole lender on these deals that gives you the ability to have that conversation, which is obviously important. Beyond that, just so people do have as well, I mean, there is amortization. I do find this market interesting, because it’s not every loan just as 1% sometimes you get more tailored amortization this concepts of cash flows suites, although I think you need to test how real they are. But in certain instances, they do help and sort of mitigate. So, covenants other forms of financial structure I think are available in this market that by sort of comp are probably not available in the syndicated market.
Kenneth Lee
Okay. And we will open up let’s see if there is any other comments from other panelists before we move on. Let’s talk about the macro environment given the recent moves in interest rates, and for example, we have seen a steepening in the yield curve with the 10-year treasury yields moving up. Could you next talk about potential impact to net investment income and NAV just given all the rate moves? And for this one let’s start with you, Tanner.
Tanner Powell
Yes, sure. Thanks, Ken. So, in terms of moves in interest rates and actually, Josh made reference to this, lot has been made of where the 10-year is going, but the short end of the curve has been, if anything, it’s actually gone down. If you look at LIBOR it’s down a handful of basis points at the same time that the treasury has – your 10-year treasuries has widened. And so where – I guess you see the most explicit impacts, particularly to your question, Ken, as it relates to NII is in terms of the short-term and in particular LIBOR. And so, I think – and this is – this range, this will range trough for other of my panelists, but we are predominant – we are 100% floating rate and actually 91% of our borrowers have floors. And so interestingly, at this moment in time, an increase in interest rates is actually NII dilutive up to kind of that 1% floor, which is where most of the floor is set, because we do not have a commensurate – we don’t have a floor on our financing, for that portion, that’s floating. So, you have a dynamic wherein, up until 1%, you are actually heard and then obviously above 1%, you start making it back and then eventually there is an outright. So from an NII standpoint, again, important to note that for now, the front of the curve has not really moving everything LIBOR is down a handful of basis points, but short-term moves are actually NII dilutive given the structures of floors on the assets, but not on the liabilities.
Kipp deVeer
Ken, let me just jump into – I agree with Tanner, we have some of the same thoughts, but I take it a little bit in the different direction just away from the fundamentals, right. We just – on the backs of a benchmark 5-year, that’s pretty low, we just raised a $1 billion of debt at 2.15% right, as an issuer. We are all because of the way that the LIBOR to 5-year benchmark are relating are pretty well positioned. Because we have got 1% floors on most of our assets floating rate, right and we have got the ability to fix coupons that, we have issued more on secured notes than anyone in the market, historically been 3.5% to 4.5% all-in. Guess what, they were just 2.15%. So like, that’s all really great. The other thing I always want to remind folks at a financials conference where we are the BDC spotlight is, we don’t run leverage companies, right. We are leveraged one to one. So we are not a bank. We are not a mortgage REIT. Rates is not critically important to what we do for a living what’s critically important is quality of underwriting, company selection, risk management, post-closing and the ability to lock in that significant net interest margin for a long time in a durable way, right. My last comment would be a little bit more off the cuff, which is I hope rates go up more quickly than everyone expects because that would throw some cold water on the markets, which frankly would make our investing business a lot easier. So I would view that [Speech Overlap]. You can that one.
Tanner Powell
Yes. I mean, I think Kipp hit it exactly right, which is when you look at the space and you look at divergence of performance, little has to do with cost of phasing. It’s basically what are your return on assets and what are your credit losses? That is the divergence of the space. And so just because you are not running massively levered, you know, given the regulatory framework, it’s financing costs are a not a determinant of performance on an individual BDC by BDC space, although I would love various cost contingencies just to put it out there. I mean, it’s – the key is I think maybe just as the last thought there, right, I mean, we are thrilled with the deal that we did, I think you guys did some pretty nice deals too in the unsecured market that are issuer friendly, right. But for the long haul, you just need to remember that I think the BDCs are so much more resilient, just having lived through the great financial crisis running one with my partners, we actually have asset liability matching these days, right. We don’t have total reliance on secured financing, which we had back then. So, during the financial crisis in ‘08/09, I think I was trying to recall the exact numbers say on a call here at your conference, but I think our book value went from like $15.50 to $12.75 our stock went from $19 to $3.5 and it wasn’t to Josh’s point really about anything going wrong in the asset side, because they were largely mark-to-market valuations that recovered. What we had was a real question from investors as to whether we were going to survive, because we are a wholesale funded finance company with 1 year liabilities and 4 year assets, right, which by the way looking back was a legitimate concern. Now we are here to tell the worst stories, but the good news is, we have put ourselves and I think others have put themselves in positions who never have to live through that again, which is really important.
Kipp deVeer
That was quite frankly, the worst investment decision I ever made was not buying stock in 2008.
Tanner Powell
I just I just wish I had bought more.
Kipp deVeer
Yes. And by the way, the last thing I’ll say on the financing side and like post global financial crisis, everybody decided to issue baby bonds, because they thought it was cheap equity or not having been allowed to and they bought too much production. And quite frankly, in BDC context, it’s not equity, because it goes into – from a regulatory perspective count as dead and the industry paid for too much production. And that – I think that’s I can’t imagine a scale or issue or again issuing 15-year baby bonds I could be wrong, but I can’t imagine that.
Kenneth Lee
That was very helpful. And that was great color guys. We just have time for one more last question. So, for this topic given that certain sector are still under economic stress, is there an opportunity in the near-term for potentially more complex financial solutions or other financial solutions such as asset-backed lending or perhaps even some form of rescued financing opportunities as that in the near term? And for this topic, I will address this one to you, Josh.
Josh Easterly
I know we are short on time, so I will make it easy. I mean, I think the good news and the bad news is the answer is yes. The bad news is that everybody on this phone has those capabilities and those skill sets and talents. And so I think a place where there was always of excess return, there will still be some excess return, but everybody on this phone and has those talents. And so, I think there will be opportunity, but there will also be slightly more competition.
Kipp deVeer
The only thing I would just add to that, so if you had those. I do think that’s one of the benefits of these scale platforms though, right getting [Technical Difficulty] in deals that you can see [Technical Difficulty].
Kenneth Lee
Well, that’s all the time we have for today. I would like to take this opportunity to once again thank our panelists, Tanner, Kipp, Daniel and Josh for joining us today. Thank you, everyone and take care.
Kipp deVeer
Thanks.
Tanner Powell
Thanks guys.
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