Owl Rock Capital Corp
F:1D6
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Owl Rock Capital Corp
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Good morning, and welcome to the Owl Rock Capital Corporation First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded.
I will now turn the conference over to our host, Dana Sclafani, Head of IR. Thank you. You may begin.
Thank you, operator. Good morning, everyone, and welcome to Owl Rock Capital Corporation's first quarter earnings call. Joining me this morning are our Chief Executive Officer, Craig Packer; our Chief Financial Officer and Chief Operating Officer, Jonathan Lam; and other members of our senior management team.
I'd like to remind our listeners that remarks made during today's call may contain forward-looking statements, which are not a guarantee 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 the forward-looking statements as a result of a number of factors, including those described in ORCC's filings with the SEC. The company assumes no obligation to update any forward-looking statement.
Certain information discussed on this call and in our earnings materials, including information related to portfolio companies, was derived from third-party sources and has not been independently verified. The company makes no such representations or warranties with respect to this information. ORCC's earnings release, 10-Q and supplemental earnings presentation are available on the Investor Relations section of our website at owlrockcapitalcorporation.com.
With that, I'll turn the call over to Craig.
Thanks, Dana. Good morning, everyone, and thank you all for joining us today. We are pleased to report another quarter of very strong results, driven by continued growth in earnings and strong credit performance. Our net investment income for the first quarter was $0.45 per share, a $0.04 increase from the prior quarter and a $0.14 increase compared to a year ago. This is a new record quarterly NII for the company.
I want to start by putting this strong quarter in context. Going into the third quarter of last year, we were confident that rising rates and continued credit performance were going to drive significant improvement in earnings. As a result, we increased our regular dividend by $0.02 and added a formulaic supplemental dividend to our quarterly dividend structure. We recognized that we would significantly outperform the regular dividends in a rising rate environment and wanted to create a predictable mechanism to share that upside with shareholders.
Compared to the second quarter of 2022, the average base rate in the portfolio increased roughly 300 basis points and the NII has grown by over 40%, which has driven the growth in our supplemental dividend. For the first quarter, our Board approved a supplemental dividend of $0.06 per share, which is an increase of $0.02 from the prior quarter. This is in addition to our previously declared $0.33 regular dividend which results in total dividends of $0.39 for the quarter. In total, this represents an annualized dividend yield of over 12% based on the current share price, which we believe is very attractive in today's market.
We also delivered an ROE of 12.1% for the quarter, and we would expect to deliver an ROE in excess of 12% over the full year based on our current outlook for rates and credit performance.
Our continued earnings growth is complemented by the strength of our portfolio. Net asset value per share increased to $15.15, up $0.16 or 1% from the fourth quarter. The majority was driven by over-earning our dividend by $0.08 and by roughly $0.08 of net realized and unrealized gains in the portfolio.
The average mark on our debt positions this quarter increased to 97.6% from 97% last quarter. However, the primary driver of this change was the improved marks on certain debt investments which were restructured during the quarter. Excluding those, the average change in the mark on the remainder of the debt portfolio was roughly 15 basis points.
We also benefited from the increase of the mark in the equity investment in our senior loan fund, reflecting improved public market loan trading levels. In addition to higher rates, our results were driven by the strength of our credit quality, which is reflected in our very low nonaccrual rate, which stands at just 0.3% of the fair value of the portfolio with only 2 names on nonaccrual as of quarter end. We are very pleased with these results and believe we are in a position to maintain this level of earnings power and credit performance in today's environment.
That said, we continue to expect and are prepared for more challenging conditions in the back half of the year. Like many in the market, we have been anticipating a shift in consumer demand on the back of the higher rate environment and a subsequent contraction in the economy. We remain vigilant and are proactively analyzing our portfolio. Similar to last quarter, we have not yet seen any early signs of challenges across our borrowers who continue to deliver stable operating performance.
Revenue and EBITDA are growing at a modest, albeit slowing pace. Many of our borrowers are experiencing improved profitability as a result of receding supply chain disruptions and lower input costs. We also take comfort that our portfolio is primarily comprised of senior secured first lien investments with low loan-to-values across companies that have strong financial sponsor backing.
We are closely monitoring the interest coverage levels of our borrowers. As we expected, reported interest coverage continued to decline, finishing the quarter with a weighted average coverage ratio of 2.2x.
We fully recognize that the current rate environment, as it works its way through borrowers' financials, will reduce interest coverage levels over the course of the year. We believe average interest coverage on our portfolio will trough around 1.5x in the second half of this year. This will undoubtedly pressure liquidity at some borrowers more than others. However, we believe we have good visibility into the small number of borrowers which could be most affected, and therefore, we think that these challenges will be manageable.
Further, as we've said before, most of our borrowers benefit from financial and operational support from sophisticated financial sponsors. Sponsors are also preparing for a tougher environment later in the year, and we've seen sponsors positioning their companies more defensively. This includes cutting costs, putting projects on hold and shoring up liquidity.
Lastly, when these situations do get more stressed, we have the tools in place to ensure that we are in dialogue early and often with borrowers and their sponsors. This information flow and our strong documentation and covenant protections ensure that we have a seat at the table at the early signs of trouble. We can then work with the sponsors who are generally incentivized to put in additional capital to provide near-term support in order to protect the longer-term value of their investment.
For these reasons, we believe we are well prepared for further challenges to come. As we've said before, while we may see increased levels of stress, we believe defaults or potential losses will be manageable and will be more than offset by the continued strength of our earnings across the balance of the portfolio.
We are proud of the highly diversified and well-insulated portfolio we have built. Our borrowers have the advantages of size, scale and sponsor support as we enter a potentially more challenged environment, and we believe this will serve us well.
With that, I'll turn it over to Jonathan to provide more detail on our financial results.
Thanks, Craig. We ended the first quarter with total portfolio investments of $13.2 billion, outstanding debt of $7.4 billion and total net assets of $5.9 billion. Our NAV per share was $15.15, a 1% increase from our fourth quarter NAV of $14.99. This increase was driven by the continued strong performance of our borrowers and our continued over-earning of the dividend.
We continued to see the impact of the broader slowdown in M&A and refinancing activity on new investment activity across the market. Funded activity for our portfolio remained modest at roughly $94 million, which reflects the low repayment activity we continue to see.
Turning to the income statement. We are pleased with the continued strength of our earnings. We believe this quarter's NII represents a sustainable level in the current rate environment. We could see further upside if repayments pick up or dividend income from our strategic equity investments and the senior loan fund increase. Conversely, we could also see a decline in NII if rates drop or non-accruals increase, although we do not currently see evidence of either happening in the near term.
As a result, we believe that we will be able to deliver ROE in excess of 12% for the year and provide attractive dividend income to our shareholders. We have also continued to work towards our previously announced repurchase target of $75 million through the combined buying power of the company's share repurchase program and the Blue Owl employee investment vehicle.
As of May 10, an incremental $22 million of ORCC stock was purchased, bringing total stock purchased to $74 million at an average price of $12.22, of which $49 million was repurchased by the company.
For the second quarter of 2023, our Board has declared a $0.33 per share regular dividend which will be paid on or before July 14 to shareholders of record as of June 30. Our Board also declared a supplemental dividend of $0.06 per share for the first quarter of 2023, which will be paid on June 15 to shareholders of record on May 31. As a reminder, we instituted a supplemental dividend on the back of our continued earnings momentum to ensure that our shareholders benefit from the higher rate environment.
We expect to continue to evaluate our dividend policy going forward to ensure we are striking the optimal balance of sharing upside while also protecting the stability of the dividend across all market environments.
Additionally, we have a flexible balance sheet with a well-diversified financing structure. We ended the quarter with net leverage of 1.21x, largely unchanged from where we ended the prior quarter and within our target range. We also had liquidity of $1.7 billion, well in excess of our unfunded commitments of approximately $940 million.
Lastly, this quarter, we saw some stress in the market as the banking sector crisis played out. In response, our financing team rigorously analyzed the impact of a number of potential outcomes on our liability structure. We found that we had no material exposure to the affected banks, and we saw no impact to our fund operations.
We believe this highlights the quality of our balance sheet and the benefit of having diverse funding sources. We deliberately built our balance sheet to have a significant amount of unsecured bonds, over 50% of our liabilities today, and our revolver is made up of a large, diversified group of 19 lenders, led by large global banks.
This allows us to have material over-collateralization on our secured facilities, and we have structured those facilities to have limited mark-to-market exposure. We have over 60 unique finance partners across our secured facilities.
In addition, our weighted average cost of debt remains low at 5.2%, and we have no near-term maturities. For these reasons, we remain pleased with the strength of our liability structure and believe it will serve as a competitive advantage, providing the portfolio with flexibility and durability across market environments.
With that, I will turn it back to Craig for closing comments.
Thanks, Jonathan. To close, I'd like to touch on the current market environment, which remains a very attractive one for direct lending. With the public market mostly unfavorable for new issuance, we continue to see direct lenders financing nearly all of the deals that are coming to market. These opportunities are attractive because they are for high-quality borrowers with enhanced spreads, documentation and leverage levels.
As we've noted before, given continued low repayments, ORCC is currently benefiting from this environment largely through amendments and other repricing events which continue to help increase the overall spread on our portfolio.
Our growing incumbency positions are also helping to drive additional deal flow in a slower M&A environment. More broadly, recent volatility in the credit markets and general capital constraints have underscored the benefit of scale for direct lending platforms.
Given the potential challenges to come over the near to medium term, we believe that the market environment over the next couple of years will favor larger platforms like ours. Size and scale are increasingly important when it comes to fundraising, deal flow and access to financing as well as hiring and retaining top talent. And we believe that the strength of our platform will be even more apparent during this time.
When conditions are more challenging, people naturally gravitate to the stability and security that larger platforms provide, and we expect to be a beneficiary of this dynamic. Our competitive positioning today is as strong as it's ever been because of our scale and deep relationships with sponsors. And we believe that sponsors and borrowers value our capital and look to us as a preferred partner for financing solutions.
Before we open it up to questions, I want to spend a few minutes on our upcoming Investor Day on May 24. This is our first Investor Day, and we're excited to have the opportunity to discuss ORCC as well as our other BDCs in more detail to highlight what differentiates our direct lending platform.
We have a full day planned, including sessions with senior members of our investment team, discussing our approach to origination, underwriting and portfolio management to provide further insight into our disciplined approach and how we have built our exceptional track record.
We will also cover why we believe ORCC is well positioned to deliver attractive returns through various market cycles and how the stock offers a compelling total return opportunity. For those of you that are new to our story, ORCC trades around 85% of net asset value, and some of our most comparable peers trade around 100% of net asset value. So as a result, ORCC offers not only the opportunity for an attractive dividend yield but also the potential for capital appreciation to net asset value if the stock is able to trade in line with those peers over time.
We believe the current environment is one where our portfolio will not just fare well but will outperform. As we've noted before, we are prepared for conditions to get tougher from here but remain firm in our belief that any challenges will be manageable. This is because we have been extremely disciplined on credit selection and believe our portfolio will continue to perform very well and generate strong returns. We have also been proactive in fortifying ORCC's balance sheet with diversified financing sources. We seek to maximize flexibility and have locked in low-cost debt with no meaningful near-term maturities.
I look forward to seeing many of you at the upcoming Investor Day and hope that you will come away from the event as confident as we are in our process, our people and our strong credit performance. On behalf of our entire team, we look forward to sharing more on why we are so excited about the future of ORCC.
With that, as always, thank you for your time today. And we will now open the line for questions.
[Operator Instructions] And our first question comes from Casey Alexander with Compass Point.
I have 2 questions. One, I heard your comment about expecting the interest coverage ratio to decline to 1.5x in the second half of the year. I didn't hear what it is currently. And then the second part of my question is what are the inputs that went into that in terms of your assumptions? I mean how much of that is expected company performance versus how much of that is expected rate development?
Sure, Casey. So the -- it's 2.2 reported, if you will, through the first quarter. We think it's going to trough at 1.5 in the back half of this year. We did do some analysis around performance, and it does bake in the impact of a moderating economy. We expect the economy to weaken. And so we baked that into that number, but the most significant impact is higher rates. And so I don't have a precise number for you, but if I had to guess, it's 75% rate.
Okay. My second question is Walker Edison was restructured during the quarter and yet you chose to keep it on nonaccrual. Now I recognize that, at least based upon the way I read the schedule of investments, that it's 100% PIK right now. But still, most of the time when something is restructured, we -- usually, it comes off of nonaccrual. I'm curious at what your thinking was there.
Yes. No, it's a good observation. And when -- and I think it speaks to we try to be very thoughtful about every decision and investment when we put it on nonaccrual and evaluate its prospects. And you're right, we restructured this position. Typically, we will restructure a position such that the remaining debt will be a par instrument, if you will, and on accrual.
In the case of Walker, as a reminder, this is a business that makes ready-to-assemble home furnishing, think coffee tables. It was significantly benefited from COVID and stay-at-home and has seen that reverse post COVID. In addition, there have been some supply chain issues. The business, although we did restructure the debt and took a significant loss on the business, continues to face challenges. And we felt at this point, given the challenges that it's facing, that it was prudent to keep it on nonaccrual. This will be a longer road back than some of our -- we haven't had a lot of troubled investments, but the ones we've had have been quite quick to respond. This one is going to be longer. And we felt that the right -- based on the -- our judgment of where the company sits right now, it's best to keep it on nonaccrual. We hope to see improved performance, and we'll evaluate it quarter by quarter.
Our next question comes from Robert Dodd with Raymond James.
Congrats on the quarter. I mean Jonathan mentioned the bank disruption and the fact that the liability side is [ light ]. On the asset side, I mean, something like Wingspire, where you've been putting in more capital, obviously, they do working capital lines, they do equipment financing, all areas where regional banks are typically big players and maybe less so going forward. So should we expect a bit better performance from Wingspire and maybe an acceleration in capital invested in that vehicle given its target market seems to be moving in a favorable direction forward?
As you know, we've been really pleased with the performance in Wingspire. As a reminder, we built that business organically working with a very experienced management team. It took a few years for them to sort of hit the momentum that they're at now. It's performing quite well and delivering very attractive dividends and ROE for ORCC.
There, we talk to them regularly. And I think they're seeing good market conditions already just given the environment. And we will -- we do expect to continue to provide additional capital to Wingspire as they find opportunities.
It stands to reason that if regional banks pull back from credit support, that will provide additional opportunities for Wingspire. I don't think we've seen that effect yet, but it stands to reason we will. In addition, generally, in a weaker economy, companies will turn to asset-based financing more frequently. So I think that I agree with the supposition of your question. There will be more opportunities for Wingspire and we can put more capital in it and earn really attractive returns.
Your next question comes from Ryan Lynch, KBW.
First question I just had. Have you seen any sort of pullback in funding in the CLO markets or any sort of slowdown in funding in the CLO markets with the sort of disruption that we've seen in the banking sector? Or has that market been functioning kind of the same kind of pre-banking crisis versus post-banking crisis?
So I'm not sure if you're asking about how we are using CLOs to finance our portfolios or you're just talking about the general BSL CLO market?
Yes. I'm talking about the general BSL market. Obviously, there's been a big shift in loans to the direct lending marketplace. That's just probably going to continue. I'm just wondering if there's further disruption in the CLO funding [indiscernible].
I think that market is functioning fine. I don't think it's a -- it's the strongest CLO market we've seen, but it's a functioning market. We have been utilizing it. I think it's a little more expensive but it's open. It's not seeing any significant disruption. If anything, in the last couple of months, you've seen a nice rally in BSL and strengthening conditions overall in that part of the market.
And so I don't think it's an area of weakness or an area of concern. If anything, functioning fine with upside from here, I think, would be my characterization of it. I don't see it as a particular stress point, if that's what you're asking.
Okay. Then my other question was -- is I see we're in kind of a difficult marketplace as far as just the economic impacts are hitting some industries greater versus others and some industries actually have tailwinds. I would just love to hear, as you kind of look at your portfolio -- and I know each individual business has probably idiosyncratic things that affect each portfolio company you invest in, but from a higher level, is there maybe one industry in your portfolio that's maybe outperforming the rest of the group and performing really well in this current economic environment? And is there any industry that's maybe underperforming or has potential headwinds given some of the cross currents in the current economic environment?
Sure. Look, I would say, overall, most of our sectors are doing quite well. We're continuing to see revenue growth. We're continuing to see EBITDA growth. It's a little bit slower growth but still growth, and we're seeing generally strong performance across all of our industry groups. We continued to feel software is the best sector and performs the best and is continuing to see really strong results across the board from our software companies.
We do a lot in the insurance space as well, insurance brokerage, if you will. That's an area that we like and is not particularly sensitive to the economic cycle and that performs well as another example of a sector that's performing.
There are individual companies that maybe got impacted to the negative during COVID that are kind of experiencing a ramp, but I wouldn't cause -- I wouldn't call on any particular theme on the positive.
In terms of a couple of sectors that are maybe -- I won't say underperforming, but where there's a little -- some pockets of weakness, certainly, in the consumer area, there are businesses that we have that were big COVID beneficiaries that are now seeing slower demand because that demand during COVID has moved away. People ordered their products or whatnot and aren't ordering as much. And at the same time, there's some buildup of cost pressure in some consumer businesses, and that's resulting in some pockets of underperformance in consumer.
Walker would be an example, although Walker's got, I think, bigger issues, but that would be an example what I'm describing. Similarly, in the health care space, a small portion of our health care, not all of it, but a small portion were seeing pressures on labor costs, either just rising labor costs or inability to get labor that's resulting in more overtime or lower capacity utilization. At the same time, some of those providers are not able to pass through price increases immediately. They've got contracts and the like.
So again, this is just a small portion of our health care business. I don't want you to draw that observation to all of it. But those are a couple of examples of parts of our portfolio where there's some underperformance, but relatively limited in the context of our book.
The next question comes from Mark Hughes with Truist.
We will move on to the next question. The next question comes from Kevin Fultz with JMP Securities.
With leverage at your stated target, I know that the level of investment activity was largely driven by matching deployments to repayment activity. But I'm curious how you would categorize the investment landscape right now and how attractive are the deals you're reviewing relative to other vintages and also if recent turmoil in the banking sector has created even more compelling investment opportunities for Owl Rock.
Sure. We said this last quarter, I'd say it again. I think it's probably the best environment we've seen since we were a public company for new investments. Spreads remain elevated. Base rates are obviously high. In addition, we're getting very attractive OID upfront and higher-than-typical call premiums. So what does that mean? We're getting 12% to 13% on unitranche versus 7%, 7.5% a year ago. I don't want to throw this word around lightly, but I think that's pretty extraordinary. To be able to earn 12% to 13% on first lien unitranche debt at 45% loan-to-value, I think it's extremely good value and the deals we're doing are of high quality as well.
The businesses are of high quality. They're large and they're leaders in their fields. So -- and we're getting good documentation. So it's just across the board. The deals that we're doing, I think, are really, really attractive for the portfolio. And the funds that we manage that have more capital, we're doing as much as we can in those funds.
So a great environment for direct lending, the trends, public to private is one driver of deal flow. Add-ons for existing portfolio companies is another. So when we see things that we like, we like them a lot.
In terms of opportunities from the banking sector, I'm pretty balanced about this. I've been asked it a lot. I think that we do upper middle market, private equity-backed deals. That's generally not where we're competing with regional banks. We're generally competing with other direct lenders, and we're competing with the syndicated markets and the large banks that are arranging but not holding loans. That's what we compete with.
So when the regional banks are pulling back, that's not really in our bread and butter. It stands to reason that these regional banks, if they're pulling back, that there may be companies who are non-sponsored companies that just have a harder time getting financing. And if there's any of them out there that are listening, you should give us a call and we'd love to talk to you.
But I would say I don't expect a tremendous amount of that because regional banks are generally not doing non-investment-grade loans for the most part, there's pockets.
And the reason I say I'm balanced about it and cautious about it is because as regional banks pull back, it does impact the economy overall, and it impacts conditions for our portfolio of companies who their customers are getting financing from regional banks. So there may be opportunities. I've seen others say this could be good for direct lenders. I'm going to take more of a wait-and-see approach on that and just see what is it going to do to the economy, but there may be select opportunities as well. We'll just have to see how it plays. Overall, I prefer a functioning banking system and a strong economy, and I hope we get to that.
Okay. That's really great insight. And then just one more. Can you provide an update on portfolio company leverage?
Portfolio company leverage. So we talked about interest coverage. Our portfolio company leverage is probably in mid-6s-ish.
Okay. So no real change quarter-over-quarter?
No. EBITDA, as I mentioned, EBITDA has been slightly up. Leverage is up. I mean it's really the interest, obviously. The interest is -- actual interest paid is what has moved, and that's why the coverage ratios have moved. But debt to EBITDA is pretty much flat.
Your next question comes from Kenneth Lee with RBC Capital Markets.
So obviously, very attractive direct lending markets right now. Wonder if you could share your thoughts on how would you characterize the overall competitive environment, especially if you look back last like half year, a year or so.
I think it's a good competitive environment. It has been for a while, and we -- there are -- we consider ourselves, and there's a small handful of lenders in this category, the large platforms that have a lot of capital, resources, relationships, the intellectual capital, the financing to be relevant to do the large upper middle market deals that we like.
And there's just a small handful of us that can do those. And we are finding that we're seeing all the opportunities that are out there, and we're having the opportunity to participate in the ones that we like. In any one deal, there's going to be a little back and forth on terms, but I think the market is really a lender's market. There's not enough capital to do the larger deals. Lenders' bite sizes are down and so it's taking that extra effort to arrange the financing. And so the marginal lender is -- has the ability to get -- to sort of price the deal.
And so I think it's a good competitive environment. I think it's been a good competitive environment for the last year or so. There's always little ups and downs. There's also been reduced inflows generally in the non-traded space, which has been the source of incremental capital into the direct lending space. So as that has contracted a bit, it's created more purchasing power for those that have capital like ourselves.
So generally good. But deal flow is light as well. So that's the counterbalancing factor. But I think, as I said a minute ago, great environment for new investments. That's reflective of a good competitive environment for us. And obviously, the syndicated market continues to be -- it's opening back up but it continues to be weaker. And I think you'll see the banks start to commit to deals.
We're hearing that and seeing that, but they're being very cautious on terms. And so even as the banks start to come back to the market, I think direct lenders are still going to have ample opportunities to commit to deals given cautious commitment levels from banks.
Got you. Very helpful there. And then one follow-up, if I may. Just in terms of the amendment activity you're seeing in the portfolio, were there any out of the ordinary amendment activity that you've been seeing more recently?
Nothing out of the ordinary. As I -- we mentioned, there has not been a pickup in amendment activity in terms of volume. There hasn't been a pickup in the nature of the amendment activity. We had 2 or 3 amendments this quarter, that's about what we typically average. And it's the typical kinds of discussions around -- with borrowers, situation-specific. So it remains a benign environment from an amendment standpoint.
Our next question comes from Mickey Schleien with Ladenburg.
Craig, I don't want to beat a dead horse here. There's been a lot of discussion about the lender-friendly environment. I just wanted to follow that up and ask you about whether that's opening up some new industries for you to look at. There's obviously the saying, there's no bad deals, there's just bad prices for deals.
At the margin, are there sectors that look more interesting to you now where pricing is more interesting and sort of gets above your bar and is providing incremental investment opportunity for the Owl Rock platform?
Thanks, Mickey. I'm not ready to sign off on that there are no bad deals supposition. There's definitely bad deals that we would say no to at any price, but I think I understand the nature of your question.
Look, we have been really consistent to the point maybe of boredom on the sectors that we like. And you've been on our calls and you've heard us say this, we like recession-resistant sectors. We like businesses that have annuity-like cash flows. We like businesses backed by private equity in a significant way.
And our biggest sectors, software, insurance, health care, food and beverage, have been our biggest sectors every quarter since we started and it's served us well and it's put us in a great spot in a potentially weakened economy to outperform.
And so we're not going to deviate from that now. I don't think we're -- that's -- we'll ever deviate from that. So we don't try to zig into sectors that don't fit that credit profile because they're cheap or we can get above-average returns. We just don't do it.
And every so often, there will be a business within a sector that we don't love that has unique characteristics that are not reflective of that sector, and we'll do it. But we are not seeking to change that risk profile in terms of the investments that we do. And that matches up quite well with the private equity firms that we work with. That's -- those are the sectors they're most active with. So it serves us well.
Some of those other sectors, in addition to having just more cyclicality to them, they're also just -- they're sectors that tend to be financed with much higher loan-to-value because they're more value-oriented sectors for the private equity firms. And so the loan-to-value tends to be high, just not where we like to play. So nothing really new to report on that.
Our next question comes from Erik Zwick with Hovde Group.
Just one question for me today. Curious about your thoughts on the trajectory of the portfolio yield going forward. If we take the Fed, its word at face value that it's just about done hiking and going to hold for higher for longer, and I realize that the LIBOR and SOFR curves don't necessarily agree with that. But if we were to hold in that scenario, I think it would be safe to assume that the majority of the improvement in the portfolio yield is in.
But would you still expect maybe kind of a gradual opportunity for improvement as older vintages roll off and you're able to put on newer fundings and commitments at higher spreads? Is that a safe assumption? Or are there other things we should be thinking about as well?
No, it's a good question. Look, I think there's still a little bit more benefit from the higher rates in the next quarter or so. We experienced about a 4.5% base rate in the first quarter. Base rates are obviously at 5% now. So I think we've got a little more to go there in terms of benefiting from the higher rates that have already happened on the lag effect.
We look at the forward curve and take that to be as reasonable a guess as to what's going to happen, if anything. And so we would expect, by the end of this year, rates to be lower and certainly by the end of next year, rates to be further lower. And so that's going to roll through.
We -- even with those lower rates, we're going to have terrific earnings at ORCC because they're still much higher than they were a year ago and our spreads are elevated as well. So even in an environment, if you take the forward curve and take it as gospel, we should have very strong earnings this year and next year. So I feel really well positioned on that.
To your question, is there some -- can we grind that spread even higher? I mean look, this is something we've been really focused on. And if you've watched us quarterly, we have, for the last 6 quarters, really been able to grind spread higher in the portfolio as we rotated out of some lower-spread investments. It's been a very active and deliberate strategy, patient, thoughtful. And we've been able to achieve that. Our average spread today is about 670 over. I think that's probably one of the highest in the space.
So there are some lower-spread investments in the book that we did 12, 18 months ago. And as you suggest, as they get refinanced, we'll have a chance to replace those with more market spreads. So possibly, we could do a bit better. It really depends where market spreads go as the market strengthens.
So I don't want to promise we'll do better. I promise we'll try. But I think our spread is very high already relative to the peers. Again, unitranche today is coming about 650 to 725 over. So to the extent -- I'll just do this math quickly. If we had 10% of the book at 575 over and we could replace 10% of the book at 675 over, that's 100 basis points, and you're talking 10 basis points across the book. So we'll hope so, but we'll have to see how that aligns with where new deals are coming at the time that's happening.
Our next question comes from Mark Hughes with Truist.
Just a question on the trajectory of new fundings or new commitments versus what gets repaid or sold. As the market opens up a little bit, do those move in parallel or does one kind of move ahead of the other as the cycle progresses, so to speak?
Sorry, Mark, I heard you, but I'm not sure I followed it. Does what move in parallel?
Just the trend in new commitments versus pay-downs as they -- or does one precede the other as we [indiscernible]?
Look, we're -- we've got a 0.9 and 1.25 target leverage. We're towards the higher end of that. I think that's the ideal place to be. We've really -- would like to stick there. We don't want to exceed it and sort of get beyond our leverage target, but we'd like to be at the higher end. So essentially, we're matching new investments to repayments.
And so as we get visibility on repayments, we will try to match up as best we can new investments to take their place. I mean it's -- you can't be totally precise about it because the deals don't happen every day. But we're pretty good at matching them up. Certainly within a quarter, we can match them up pretty well.
If we got in an environment where there's significantly elevated repayments, perhaps there'd be a bit of a lag, but I don't -- we're a long way from that. But a more just modestly increasing repayment environment, we would layer in new deals.
I mean we are doing new investments on our platform weekly and so there are opportunities sitting here today for us to put more in ORCC. We're just sizing them to keep leverage pretty flat, so we can be nimble as the repayment opportunities present themselves.
And there are no further questions at this time. I'll hand the floor back to Craig Packer for closing remarks.
All right. Terrific. Thank you all for listening. I really encourage everyone to tune into our Investor Day. We're quite excited about it. You're going to get, I think, a much deeper understanding of our team, our process, a lot of the topics we've touched on today. And so please tune into it. If you need any help on how to get access to it, just reach out to our team, and we will help you there. Thank you, and have a great afternoon.
Thank you. This concludes today's call. All parties may disconnect.