Blue Owl Capital Corporation (OBDC) Earnings Call Transcript & Summary

Yes. Got it. That's helpful. And then maybe just talking about the stock quickly, and I know the transaction closed Monday. So the conversion to C shares, I think, are kind of hitting people's accounts. The last day or so, and there's been -- I think the day or two maybe, there's been a little bit of incremental selling. But I mean we'll see how the next several days and maybe even weeks progress in terms of selling, but what are you thinking in terms of the buyback, even sub booked value, I think that's great value. I think you guys think the same as well. But I mean, does there come a point where you maybe allocate a little bit of incremental capital into buybacks just to put a little bit of the floor in the stock.

We'll see. I mean...

We're very close to book value. So I think we're very attractive. We priced at 0.98, but it's not like we're 0.92 where it is, so it's something we'd look at. Look, maybe -- I know you probably touched on this, but maybe now it's a good time to hit it. I've been -- I totally understand why when we announced the merger that rate concern about where the stock might trade because other BDC mergers haven't always traded well. And so I understood the caution we had felt that ours would be different. And we not just hoped, we thought it would. And the reason for that is OBD had been a strong performing fund delivering great returns. And it's primarily institutional investors who, in our communications have a long-term view. And other BDC mergers, I'm not trying to speak ill of other transactions, but I think that wasn't the case in some of the other mergers. You had performance issues or you had a different investor base that kind of needed that liquidity bid. And so we felt that this would -- that there was a good potential that we would perform technically very different. But we were deliberate about it. We didn't want to just bet that, and that's why we listed it, and that's why we staged the shares coming off lockup. What I've seen is, while E traded a discount to C, that E is actually traded just fine. And we -- most of the investors have been very happy to continue to hold the stock and our discussion with them, that's what they're telling us. Now they have to do that. I don't want to promise it, but that's what they're telling us. So I think even in the first days here, where shares are coming into account, I think that's what you're seeing. You're seeing people are happy to hold the stock. And so I know that there was skepticism on this. I think that OBDC, you know this, OBDC is trading at a meaningful discount to high-quality peers -- I appreciate the skepticism, but we're hopeful if what we are being told is true that these investors are long-term in orientation and happy to own the stock, that at some point sooner rather than later, people will stop not -- no longer be concerned about the technical and see there's an opportunity. You're going to wake up -- again, my lawyers are like, I can't predict this, but there's a scenario where you're going to wake up and say, "Oh, it's above book value. I should have bought it when it was below book value." I mean, we've been above book value before. Nobody get -- you don't get like the tap on the shoulder, it's going up, but it's the factors are in place. We have -- it is an institutional investor-based OBDC trades discount to its peers, just put up great performance and I think it merits a look. We had worked through some of the technical issues at OBDC previously, a lot of shares have traded out, I think this is kind of the last piece is getting the merger actually closed and announced. And so I'm hopeful that that's how people look at it.

Yes. Got it. And I was even going to ask you and maybe it's a better question for you guys to ask. But really, in your seat, why has C traded at such a discount to really ARCC and BXSL. I mean, those are really the 2 at kind of call it, [ 115 ] today. And it sounds like do you think most of it is technical, and I agree. I mean if you look at the underlying fundamentals, they're arguably better, if not quite similar. And so what are you focusing on, I guess, moving forward, I think getting the deal done, getting the merger completed and then moving forward, like is it just continued execution and head down regular way blocking and tackling. And at some point, the market will wake up and kind of see the disconnect? Or I'm just curious kind of what you're trying to do moving forward to close that gap?

Look, I -- from my perspective, I kind of keep going back to Investor Day. If folks went to the Investor Day, we went -- we did a number of things. We told the story, we increased the dividend, we did a buyback, employees bought shares. That was a really -- I mean those were really good entry points. We felt at the time it was primarily technical, and the stock performed very well over the year or so after that. And from my standpoint, it was technical and that had washed through and the fundamentals prevail but then we announced the merger and the merger introduced a new, different technical factor. And now that is over. And so yes, I mean we're -- I don't want to seem like we're complacent, we want to take advantage of our scale on the liability side, optimizing the portfolio, continue to provide ROE higher, but I think our fundamentals, as I think you're acknowledging, are very comparable. There's no reason for us, so I think it remains technical, but I understand it. And I think for investors that are listening that haven't -- didn't want to like go through the brain damage of thinking about it, you don't need to think about it anymore. It's done. It's in the rearview mirror and now you look at it fresh, and let's see over the next -- I mean, you tell me better. I won't try to force a timetable, but whatever timetable in your mind, I'd ask everybody, how much time does it take for you to be convinced that the technicals are out? And whatever that is, put a little reminder on your phone. And when it's over, I'd just say at that point, can we agree that it's no longer technical because I think that's -- and again, some of the analysts, they took a wait-and-see approach, but they did it in a very complementary way. So I think that at some point, the fundamentals will win out, they did post our Investor Day, they will here. And I actually think it will be sooner than previously thought because I think it's already showing itself in the volume and activity in the stock.

Yes. Okay. That's great. And then even -- I think the stock gets there, but some of the peers that trade decently above both, they're active on ATMs, and they're able to kind of lean in and grow -- lean in on growth kind of year in and year out. And so assuming stock starts trading better or consistently above book, like how are you thinking about growth of OBDC, the utilization of the ATM and just essentially raising additional equity capital to be levered and ultimately invested kind of back into the market? Like how should we think about that, is it...

Look, we want to -- we're well aware of what some folks have done there, and they've done a really nice job with it. And it seems like that's gone very smoothly. We want to avail ourselves of all the tools. It hasn't been a front-burner issue given where we've traded. It hasn't been something that we had to really be focused on. But given what I just said about where we hope it gets to, I think it's something that can be part of the conversation. It's certainly something that we would want to discuss with our Board, at least to put ourselves in a position where we can take advantage of it. I think it would make a lot of sense. But again, we are scale, and we would want to be really good stewards about doing that. We don't -- we're not trying to like crawl like above book value for 10 minutes and try to take advantage of ATM. So we'll be deliberate about it as we always are, but I think it's something we haven't had in our toolkit that we probably should have.

Okay. All right. That's great. Maybe shifting gears a little bit or expanding the conversation a little bit. The broader Blue Owl platform has been a busy 12 months or so on the strategic M&A front. That's been getting a lot of focus in the market broadly, especially for Owl, but you acquired Atalaya, great alternative credit business. Ivan and the team, have been at it for a couple of decades now. So what is -- like having that business, yes, they're not the same at the underlying assets, but there probably are opportunities to maybe put some of those assets into OBDC or even just the deal flow. So I'd love to just get your thoughts on what that acquisition does for OBDC, all the BDCs and the broader credit platform?

Yes. So for folks that haven't looked at Atalaya is an alternative credit provider. So they -- that is an umbrella term for a number of lending strategies many of which are asset-based in some way, shape or form. It could be buying or lending to portfolios of consumer loans, commercial loans, equipment finance, NAV loans, sub lines, a variety of lending strategies. What it's not is it's not sponsor-backed cash flow lending, which is what we've been doing. So it's distinctive -- it's a growth area. A lot of the trends that we saw in direct lending 10 years ago, we see in the alternative credit space today, a lot of that interest from clients in that asset class. So we think we're going to be able to to scale the auto business, the alternative credit business. It's integrated very smoothly. I work very closely with Ivan and the team, they're terrific, and they're very much -- we're in the Blue Owl jerseys already, and I'm excited about that. But to answer your question, we now have access to 65 investment professionals sourcing billions of dollars of assets most of which will not be appropriate for our BDCs, but there are going to be opportunities that can be invested across the platform generally. We are not going to change our stripes. We are not going to change our strategy. There are investments in our alternative credit business that have the consistent, predictable cash flows that are similar to our direct lending strategy, and that they can offer creative returns, we can benefit from our team's differentiated sourcing and underwriting and structuring, we will do that. But a lot of what they do is really attractive returns, but it's a different type of risk, and we're not going to put that in. So we're going to be -- I don't -- it's not going to change the face of OBDC, but it's going to widen the funnel and it's going to, on the margin, give us more opportunities for attractive investing. It also makes us just that much more a better call from private equity firms, from companies, think of the technology area. Part of what the alternative credit business does is there are a lot of like fintech companies that are sourcing loans that don't have balance sheet. Historically, they would go to Wall Street to securitize those loans. Part of what our alternative credit business can do just like our direct lending business can do is go to those generators of assets and say, "You don't need to securitize it. We can buy that portfolio, or we can make a loan against that portfolio, capture better economics and structure." Underlying those assets are high-quality loans with very predictable performance characteristics that generate income and payments and the kind of, if I can say it this way, lower risk part of the alternative credit business, I think, can be a nice accretive addition to our portfolio in the direct lending space.

Yes. All right. That's great. And kind of related to the alternative credit theme, and I think if you look at -- I think everyone talks about private credit today, but really, historically, it's just been for most part direct lending, right? And so the last decade really has been an evolution of direct lending. And so I think if you look over the next 5 to 10 years, this whole alternative credit, asset-based finance, asset-based lending is really, I think, going to accelerate and probably is the biggest growth driver in the industry. But I guess how do you see it evolving from here? Just kind of bigger picture across the industry and really just given your experience in direct exposure within the direct lending side, the last decade. So just trying to think through where this goes from here.

Look, as I'm saying, I think we see a lot of the similar themes, which is there are large pools of assets that historically have had to been intermediated. And the real story here, people talk about private credit versus the public markets. I think of it as direct versus syndicated. The value add that we offer or our large peers is if you're a borrower or owner of assets, we can give you privacy, certainty, customization, scale and be a reliable partner in all market environments. That's what direct lending, that's what just -- people have come to realize and alternative credit, the reason why it's so exciting is similarly, before you just had to do is go through a securitization market to get scale you just couldn't do it billions of dollars at a time. Atalaya for is a wonderful business, but it's $10 billion in assets. We think as part of Blue Owl, we can grow that business like pretty meaningfully and that by doing so, we can offer bigger solutions to their counterparties and you get that same benefit, which is the asset class grows and the quality grows because you're offering bigger solutions. Look, our peers, and they deserve lots of credit for this, they're in the space and they're talking about these markets in trillions. And at Blue Owl, we don't need trillions. We have a $10 billion alternative credit business that if we can just do a really good job with some -- raising some additional pools of capital and deploying it, we can grow it exponentially whether the market is $1 trillion or $10 trillion, we're not at the point where that distinction is going to make a difference. These are high asset classes. But I think this is -- I want to keep coming back to it because I think, again, I've been in these markets a long time, and I think there can be a little bit -- it's the ability to provide a direct solution in scale that is the difference maker. And now we didn't have that before. We have it. Last thing I'd say, just again, I know we're jumping back and forth between OBDC and Blue Owl, and I'm sure my compliance people are going to be really upset with me later, but -- we also acquired a business in the insurance space, Kuvare Asset Management. And that's an important piece to this. We didn't have that. We didn't have insurance capital before. It's investment-graded in nature. It's a lower price point. But by marrying up insurance space, which is acquiring many of the same assets, they're just doing it at a lower risk profile, you can combine the insurance and the alternative credit, and that's what provides the scale. And so it's important for those who follow Blue Owl. It's not just having the alternative credit business. the insurance piece alongside it. Again, some of our peers have done a really nice job with this. Different people have approached in different ways, but that this theme is a powerful one.

Yes. All right. That's great. Well, I guess I'll try and leave it there for the OWL specific questions. But I guess sticking with the macro a little bit, in the industry. And I think as spreads have come in quite a bit to last year. We've been getting some questions from the market. It's like -- the excess spread and excess yield and return and the alts have delivered a private credit has delivered to date, does that start to deteriorate over time? And I think as spreads continue to go lower, some folks will say like, oh, yes, see you have excess spread and excess return is going down. So I mean, how do you think about excess spread, excess yield. And I think you touched on this a little bit in terms of the solution that you bring to borrowers. But I guess, what would your rebuttal be to a statement like that?

Yes. Look, I think anybody who's in the market and compares to markets knows that the alternative space is still getting a premium. Spreads are lower, but spreads in every market is lower. Talk to folks in the broadly syndicated loan market about where spreads are. They've gotten crushed on spreads. Talk to IG, they've gotten crushed on spreads. All the market spreads have tightened, we still get a premium, but it's all relative. Single B loans are getting done on the low 300s. So our unitranche pricing, it used to be 600, I love 600. We can't get 600 when the syndicated markets at 300, we're getting 475 to 500. That's still a really big premium and we're getting underwriting fees. The alternative space continues to get a significant premium. It's going to move up -- the actual spread is going to move up and down based on where the markets are. We don't operate in a vacuum. Base rates are also staying high and so the absolute return is very good. I also think that there's a heavy cyclical component to this. I mean, again, if anybody who observes the CLO market, the entire CLO market repriced last year. The $1.5 trillion repriced. That impacted our spreads. That's not going to happen again. And at some point, if that market reverses, then everything will widen a bit. And this happens in a very -- it's unpredictably predictable. This happens every few years, and it will happen again. And if we get even a modest pickup in M&A, which I think most people expect and you get just a less frothy BSL market, it's going to help direct lending spreads. I will stop this and the last comment I'd make -- the investors get this. There's a lot of appetite for the funds. They get this. The returns are attractive. And we continue to be able to generate really attractive ROEs even with a tighter spread environment. So I think it's all working, but you have to -- it's all relative.

Yes. of course. And I feel like we kind of -- it's been this perfect storm, if you will, in terms of how tight spreads have got, and the dynamics that you had stated and I think everyone's been hoping and thinking this recovery in sponsor M&As. I think a lot of people thought maybe that inflection recovery was last year and here we are to start 2025, and we're still hopeful to that. So -- and I guess like -- what's your view about why is it taking so long for sponsors to come back to the market? I think on paper, I think you could say they should really be active with markets where they are, where our borrowing costs are, where spreads are. Maybe it has to -- maybe it comes down to the underlying assets that they own and where they're marked, but I'd love to just get your perspective on what's been driving the lack of deal flow and even just your outlook for '25?

Okay, a year ago, I would have said I expected to pick up and I was wrong. So I don't want to overstate my ability to see the future. Look, I think there's some inexorable forces that will eventually result in more M&A. The private equity firms, the LPs badly would like to get some capital back. The private equity firms would badly like to exit. Every -- I talk to private equity firms all the time. They all have several companies that they're eager to sell, and they've generated -- and they think they've generated great returns. I think at the risk of oversimplifying it, I think as rates went up, and just generally, the market environment we were in, the sponsors were not confident they could exit at the values they thought they deserved, and that we're willing to be patient/stubborn about exiting, but that's not -- can't go on forever. And I think -- and they don't want it to go on forever, they would prefer. So at some point, the pendulum will swing. It's just about can they exited at the returns, and they felt like with rates higher, maybe a little higher valuation, and they want to wait a little bit more on performance. But again, what the company is doing as well as they are, I think you'll see some of that. So I'd be surprised if we don't see some pickup in M&A this year, whether it's a boom year. I mean you've got a lot of -- all the factors are in place to see that happen.

Yes. I got it. Okay. And maybe on -- you talked a lot about sponsors, and I think you focus on the upper middle market sponsor backed. I mean, some in the industry are talking about the non-sponsor opportunity. I'd love to just get your quick thoughts on what you think yet the opportunity is there, what the exposure is even at an OBDC on that front, et cetera?

Mean we've always done some non-sponsored deals even though we're primarily a sponsor shop for folks that follow us associates. One of our single largest investments, there's no sponsor involved there. And at any one point in time, probably sort of 10% of the portfolio is non-sponsor. The challenge with non-sponsor, they tend to be family or founder-owned businesses. You don't have some of the same governance or the ability to support the company when there's a challenge. So our bar is high because of that, and we want businesses like an associate that -- very predictable and scale. And so when we find them, we'll do them. It's hard to do it in scale. I mean it's hard to do it in real scale because it's maybe obvious, but it's just to deploy a lot of capital in non-sponsor, which is idiosyncratic and episodic in nature, it's just hard to do in scale. Most of the large BDCs are primarily sponsored. We're open to doing it, and we have folks that spend all their time talking to family offices or talking to founder-own businesses, and we're open to doing it. But it's not -- it's hard to do it in the kind of scale that we're talking about here.

Yes. Got it. Okay. That's helpful. I know we're getting close to the hour. So maybe just a couple to wrap. I mean, at the end of the day, you guys are credit investors, right? So -- and I think you think about the world in like worst-case scenario or downside risk, but I mean you look at 2025, and it's still early. There's a lot of variables, things could change. We'll see what happens in D.C. But anything you're paying attention to or any potential surprises that we could see throughout the year, positive or negative?

Look, I'll try to give you an honest answer. We spent our time. I want to [indiscernible], would you lay awake at night? I worry -- it's the idiosyncratic credit risk. The macro environment, I think, is a pretty good one. I think that we certainly have names on a watch list and problems we've worked through, but we spent a lot of -- we spent a disproportionate amount of energy on the 3% to 5% of the portfolio that's just the most challenged and some of the companies, certainly, with higher rates now for a couple of years, it's tight. The sponsors continue to support them, but there's a lot of energy that goes into those and just keeping them in good stead. Beyond that, I think it's going to be a good macro environment. I think that rates -- so we cover the gamut. Are they going to go up, go down? I think if rates stayed right here, that would be a good -- kind of land at a good base for direct lending. Okay, I certainly know there are those out there that are worried a little bit about, hey, if you're doing a lot -- government and a lot of stimulus, and what's that going to do for rate, could rates -- could there be some government deficit crisis or spike. So those are -- I don't -- we're a bottoms-up investor. We're not a hedge fund. I hate -- I always find it helpful at least for myself to remind me of the basics. We have 236 portfolio companies. The loans are a weighted average life of 4.5 years or so. That past the next administration, as long as these companies continue to pay us their interest and principle, and we're a floating rate lender, we're going to deliver great returns for our clients and try not to get too caught up in the top down because it's just not -- it's sort of not -- we can't control it, and it doesn't -- we really don't try to bet on where we are in the economic cycle. It's why I love software, and that's why we stick to the parts that we think are going to stay very stable. I know these are maybe kind of basic answers, but that this is how I think about it. And I think for those that are more anxious about the world, first lien floating rate debt is a defensive place to be if you're more anxious about the world.

Yes. Got it. Okay. Great. And then last one, maybe more of a governance question. I don't think you're leaving your day job anytime soon. But I just -- how do you think about succession planning, I guess, longer term, I know Logan's gotten elevated. He's been taking on more responsibility. He's been doing a great job, and I know you've brought in some others up kind of within the platform. But how do you just think about that kind of longer term. And really, as the evolution continues, you have the right team in place and continue to just execute and do what you do, but just would love any thoughts there.

Well, I appreciate it. I'm glad you started with you don't expect me to be leaving anytime soon. I'm not going anywhere anytime soon. I enjoy doing it and love our team, love our company. We have a lot of exciting things ahead. But look, we have a deep bench, Logan Nicholson. Many of you met him. If you haven't, you would love to get in front of him. Logan is someone who joined our team a couple of years ago, who had worked with me earlier, my career at Goldman, and we named him President of several of our BDCs, but we have a deep bench, Erik Bissonnette, does a great job in our technology BDCs. And there's a number of folks, our investment team is 100 -- well, when you add in all, it's more than 200, but the direct lending team is 150 people at this point, and there's a lot of folks behind the scenes that can do more and will, at the right time, have a chance to do more. So honestly, it's not a front-burner issue in my mind, but I wouldn't want. Look, here's what I would say, maybe to answer it this way. Anybody that's watched us, everything we do, really thoughtful, really careful, really deliberate. Look at the listing of E and the merger would see everything, so you can bet when it comes time to things like succession will be equally thoughtful and deliberate about it.

Yes. All right. Well, just figured I'd ask, but we'll leave it there. Thank you, Craig and Jonathan. Great rundown. I know this is an exciting week for you guys and I think the next chapter here has commenced, but congrats on the deal and I appreciate the time, and we'll definitely stay in touch. And then if investors have any follow-ups. I'm always around and happy to catch up at any point. So appreciate it guys and take care.

All right. Thanks, Brian.

Thanks, Brian.