Owl Rock Capital Corp
F:1D6
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Owl Rock Capital Corp
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Good morning, and welcome to Owl Rock Capital Corporation's Second Quarter 2019 Earnings Call.
I would like to remind our listeners that remarks made during the call may contain forward-looking statements. Forward-looking statements are not guarantees of future performance or results and involve a number of risks and uncertainties that are outside the company's control. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in Owl Rock Capital Corporation's filings with the Securities and Exchange Commission. The company assumes no obligation to update any forward-looking statements.
As a reminder, this call is being recorded for replay purposes.
Yesterday, the company issued its earnings press release and posted an earnings presentation for the second quarter ended June 30, 2019. This presentation should be reviewed in conjunction with the company's Form 10-Q filed on July 31 with the SEC. We will refer to the earnings presentation throughout the call today, so please have that presentation available to you. As a reminder, the earnings presentation is available on our website.
I will now turn the call over to Craig Packer, Chief Executive Officer of Owl Rock Capital Corporation. Please go ahead.
Thank you. Good morning, everyone, and thank you for joining us today for our first earnings call as a publicly traded company. This is Craig Packer, and I'm CEO of Owl Rock Capital Corporation and a co-founder of Owl Rock. Joining me today is Alan Kirshenbaum, our Chief Financial Officer and Chief Operating Officer.
Before we begin, I'd like to take a moment to welcome our new and existing investors as well as members of the research community to our earnings call this morning. As this is our first call since we priced our initial public offering 2 weeks ago, I'd like to begin by briefly discussing our IPO.
On July 17, we priced an IPO of 10 million shares of ORCC on the New York Stock Exchange at a price of $15.30 per share. Gross proceeds from the IPO totaled approximately $153 million. We're really pleased with the outcome of the offering, which resulted in ORCC becoming the second largest publicly traded BDC based on our current equity market capitalization of approximately $6 billion.
Since we began Owl Rock in 2016, we've tried to take an innovative and shareholder-friendly approach, and we pursued our IPO in a similar manner. Our IPO included a number of shareholder-friendly features which we believe contributed to a successful outcome. And Alan will review those in his comments as these actions will continue to take effect throughout our first year as a public company.
As a reminder, on July 9, as we began our IPO road show, we pre-released certain selected financial results, including net asset value per share, our quarterly net investment income per share and quarterly dividend per share. Today, we are reporting strong results for the second quarter, right in line with the ranges that we provided at that time.
Net investment income per share was $0.42 for the second quarter, and we ended the quarter with net asset value per share of $15.28. In addition, our Board of Directors has declared a second quarter dividend of $0.44 per share. This is the last floating rate dividend we will pay as our Board has declared a third quarter dividend of $0.31 per share in addition to a series of 6 previously declared special dividends throughout 2019 and 2020 that Alan will discuss later in more detail.
We are pleased with our results which continue to deliver strong returns for our investors. For the 3 months ended June 30, we generated an annualized ROE of 11% based on net investment income and an ROE of 11.5% based on net income.
Given this is our first call as a public company, I'd like to spend a few minutes discussing the steps we took to build Owl Rock and what we believe our key differentiators are for those of you who are relatively new to our story.
Owl Rock is an independent alternative asset manager focused on direct lending and led by senior investment professionals with significant experience in middle market lending and investing. Owl Rock Capital Corp., or ORCC, is a newly listed company that has been operating as a business development company for over 3 years. When Doug Ostrover, Marc Lipschultz and I founded Owl Rock in 2016, we sought to build a market-leading direct lending platform. We feel scale is very important in the direct lending space as it allows us to win some bigger companies, which we believe by and large are safer credits, while maintaining high levels of portfolio diversification. It also allows us to be a distinctive and highly valued financing source for high-quality borrowers and private equity sponsors.
In order to scale, we focused on raising committed drawdown institutional capital, and we have been deploying this capital since our inception. Having this capital base allowed us to make a significant investment in our direct origination capabilities, which has driven substantial proprietary direct deal flow.
In addition to my partners and I, we have built a large team of experienced senior investment professionals who are responsible for originating investment opportunities. We currently have over 50 professionals on our investment team focused on origination, underwriting and portfolio monitoring, and we believe we have assembled one of the largest and most experienced teams entirely dedicated to direct lending, creating a wide funnel of investment opportunities.
Having a large funnel allows us to be highly selective investors, something we believe is critical to our success. We've reviewed over 3,500 opportunities since inception from almost 400 different sponsors. Of those opportunities, we've chosen to invest and close on less than 5%.
Our scale, coupled with our direct origination model, allows us to invest in stable, middle to upper middle market companies, which we believe are often more durable businesses and better able to withstand the economic cycle or other changes they encounter. Our underwriting is focused on top line stability and downside protection, and we perform detailed private side due diligence typically for 3 months before making an investment.
The weighted average EBITDA of our borrowers was approximately $79 million at quarter end. These companies are often leaders in their industries, have a strong competitive position, are typically supported by a substantial equity investment from a leading private equity sponsor. We are very focused on credit documentation of our loans and have a team with deep experience in this area.
Our portfolio today consists of $7.2 billion of directly originated senior secured floating rate loans designed to deliver returns that are consistently a premium to those available in the public credit markets. We think our model is working quite well, and that is reflected in our second quarter results.
For Owl Rock, the second quarter was another active quarter on the investment front. We entered into new investment commitments totaling $953 million, of which $773 million was funded this quarter. This quarter's pace was very consistent with our first quarter, in which we also funded about $800 million of new investments.
During the second quarter, 85% of our new investment commitments were first lien term loans and 15% were second lien loans. As of the end of the second quarter, in total, our portfolio was 81% first lien.
We continue to maintain a strong bias towards pursuing capital preservation versus chasing returns in the current market environment. The percentage of first lien investments in our portfolio has increased almost 10 points versus a year ago, and we think this is an appropriate approach at this point in the credit cycle.
These investment commitments were distributed across 26 portfolio companies. Roughly 75% of this quarter's investment volume was across 13 new portfolio companies, and Owl Rock was lead arranger or administrative agent on 80% of those deals based on invested dollars.
As a reminder, Owl Rock manages 4 funds, and we routinely will allocate investments across those funds. So the portion of an investment that is going into ORCC is typically not 100% of the overall Owl Rock platform investment. We view this as a competitive advantage as it allows us to speak for larger investment sizes versus many of our peers and control economic terms and documentation while maintaining portfolio diversification.
In addition to the new portfolio companies, 13 investments remain in existing portfolio companies. These were fairly smaller add-ons to current positions at an average investment size of roughly $20 million, and these add-ons made up approximately 25% of this quarter's investment volume.
Often, these add-on opportunities were anticipated at the time of our original investment, as many private equity firms are pursuing buy and build investment strategies which entail additional accretive acquisitions.
It's worth noting here, as a relatively young fund, we do not yet have as much of a benefit that some other funds have in terms of having a large group of incumbent positions. That being said, our list of portfolio companies is growing and we expect will continue to grow over the coming years, allowing us to more fully benefit from that dynamic.
We like add-ons as they allow us to intelligently grow our portfolio as we're increasing our exposure to companies we have previously fully underwritten and have been closely monitoring. This quarter gives a sense of the kind of investment activity that incumbency can drive as we continue to grow.
With 90 portfolio companies now in ORCC, I would also point out that given our large team of over 50 investment professionals, our ratio of portfolio companies per investment professional is less than 2:1, giving us ample capacity for future growth while maintaining rigorous portfolio oversight and support.
We continue to see the benefits of the scale of the overall Owl Rock platform. We're go-to call for companies and financial sponsors and can provide differentiated solutions to our borrowers. Our ability to underwrite and hold individual positions as large as $200 million to $600 million across the Owl Rock platform is a significant competitive advantage.
On this note, in the second quarter, ORCC, along with other vehicles managed by Owl Rock, provided commitments for 2 loans, both of which were over $225 million in total financing size and were done on a sole basis by Owl Rock.
To pick one example, we were pleased to provide financing to support the acquisition of Corepoint health care by Hg's portfolio company Rhapsody. Both companies sit in the health care IT space focused on data integration software, enabling health care organizations with disparate systems to seamlessly share patient information. In this situation, our team was able to leverage our institutional knowledge of this asset to provide our client with certainty of execution through a sole commitment for the entire facility.
In addition to originations, repayments are worth spending a few minutes discussing. This quarter, we saw $465 million of repayments, which is our highest level of quarterly repayments since inception, primarily due to the full realization of 2 large investments in TransPerfect Global and Brigham Minerals.
As Alan will touch on in more detail, these repayments were accretive to NII due to call protection and the acceleration of remaining OID. We expected these repayments, and we're pleased with the outcome of these investments, more of which I'll talk about in a moment.
But before doing so, I wanted to touch on our expectations for repayments going forward. Typically, we make loans with maturities of 5 to 7 years, and we assume as a rough rule of thumb that investments will have a 3-year average life. To illustrate that point, if you look at the investments we made in 2016, the first year of our investment activities, about 50% of the loans we made that year have already been repaid, which would be consistent with a 3-year average life. Our high-level expectation would be to see about 1/3 of the portfolio turnover each year once we're fully invested, which is obviously dependent upon market conditions.
While we are ramping, the pace of our repayments is hard to predict and can be lumpy as the timing of a repayment is idiosyncratic to the borrower. While our pace of repayments increased in the second quarter, as of this moment, based on what we can see, the third quarter is currently pacing at a more modest amount of repayments than we just experienced in Q2. That said, going forward, over time, we do expect our overall pace of repayments to increase as our portfolio ages. We'll just take some time to get to that typical repayment pace.
Going back to this quarter, I'd like to talk about TransPerfect for a moment, as it was a company we like a lot and I think represents the kind of compelling opportunities we can offer our investors. TransPerfect is a global language service provider, offering a broad set of translation services for highly regulated critical end markets. An example of this would be translating the medical language on prescription labels for large global pharmaceutical clients. It's a great business with a strong record of historical performance and a highly defensible market position.
In 2018, we provided $420 million of first lien financing on a sole basis with proceeds to support the co-founders' buyout of the business. Given our ability to underwrite the entire deal and to provide certainty during a long, complex M&A process, we were able to provide a compelling risk-adjusted investment for our shareholders. Our facility was priced at L plus 6.75%. And as the company continued to grow substantially, the loan was refinanced this quarter by a commercial bank group, and we earned over 13% gross rate of return.
We are proud of our track record to date. We have realized over $1.6 billion of invested capital since inception, generating an aggregate gross IRR of over 11.5% on those investments. When factoring in portfolio leverage, our returns are higher. We remain steadfast in our commitment to quality underwriting and downside protection. For this quarter, we continue to have no investments on nonaccrual status. And since our inception in 2016, ORCC has not had any principal losses or defaults.
Moving into more portfolio detail, we booked a large and diverse portfolio of high-quality borrowers which stood at $7.2 billion as of quarter end. It's broadly distributed across 90 portfolio companies and 27 industries with the largest industry representing just 10% of the portfolio.
The diversification of our top 10 investments continues to improve and is now down to 27% of the portfolio, and the average investment size is $80 million. Over 98% of the portfolio is senior secured, and more than 99% of our debt investments are floating rate.
We believe the portfolio is conservatively positioned. 81% of investments were first lien term loans, nearly the highest percentage since our inception.
Although proud of the progress we've made on the investment side, we're equally focused on the liability side of our balance sheet. This past quarter, we accessed the public investment-grade bond market with a $400 million senior note offering, which was executed while we were still a private BDC, and we believe we are the first private BDC to execute a public bond offering.
In addition, we completed our first portfolio of financing in the CLO liability market and raised $390 million of debt at a highly efficient cost of funds. Successfully tapping these 2 markets sets the stage for future cost-efficient financings.
I will now turn the presentation over to Alan to cover additional detail on our financings and our quarterly results.
Thank you, Craig. To start, on a personal note, it's great to be speaking with everyone again. My whole team and I have been working hard on behalf of our shareholders to get to this point, and it's great to be back. The results we have posted for the second quarter of 2019, I'm very happy to report, are in every way consistent with what we previously guided to. We'll start with reviewing some high-level information, then we'll dive deeper into things like our dividend policy, our financing landscape and some items related to our IPO.
So to start off, on Slide 6 of our earnings presentation, I'll be referring to the earnings presentation throughout my remarks, you can see that we ended the second quarter with total portfolio investments of $7.2 billion, outstanding debt of $1.6 billion and total net assets of $5.7 billion. Our net asset value was $15.28 per share as of June 30 as compared to $15.26 per share as of March 31. Our dividend for the second quarter was $0.44 per share, and our net investment income was $0.42 per share, all in line with the estimates we provided.
On the next slide, Slide 7, you can see total investment income for the second quarter was $176 million. This is up $25 million from the previous quarter or just over 16%. We should generally expect to see revenue increases for the next several quarters as we continue to lag back into leverage, building up to approximately $10 billion in total investments. The increase this quarter was partly driven by accelerated amortization of upfront fees and prepayment fees from the full realization of 4 investments, some of which Craig touched on earlier.
On this slide, you will see a breakout of revenues where we provide some additional transparency into the revenue increases I just discussed. What we've done here at the top of the slide is split out our interest from investments line between, one, interest income earned during the period; and two, income earned from prepayment fees and accelerated amortization of upfront fees from unscheduled full or partial paydowns, both of which run through interest from investments on our income statement.
As you can see, we had a strong level of interest from investments other fees this quarter due largely to the paydowns of TransPerfect and Brigham. Over time, this will become a more meaningful component of our revenues.
As for expenses, total expenses for the quarter ended June 30 was $56.7 million. This is up only $2.9 million from the previous quarter or about 5%, which was primarily due to higher interest expense in connection with putting into place new financings.
Let's talk about our dividend policy and structure for a moment. The second quarter of 2019 was the final quarter where we operated under a floating dividend policy. For the second quarter, our Board had previously approved a dividend of 100% of our GAAP net investment income. Therefore, the only change in net asset value quarter-over-quarter would be due to changes in unrealized, and we ended up posting $0.02 per share of net unrealized gains in our portfolio for Q2. Our net income was $0.44 per share for the second quarter, which equates to an 11.5% annualized ROE.
This change in net asset value per share and our ROE reflects the combination of strong portfolio performance and an industry-low cost structure. And I mean cost structure in 2 ways. First, our other operating expense ratio is 27 basis points for the trailing 12-month period ended June 30, among the very lowest in the industry, if not the lowest. For 2019, we target a range in the mid-20s to low 30s basis points. The second reason is related to our fees. As a reminder, since our inception, we have only charged a 75 basis point management fee and no incentive fee. Although our management fee post-IPO is 1.5% and our incentive fee is 17.5%, we chose to waive this best-in-class public BDC fee structure and keep for 5 quarters after our IPO our industry-low 75 basis point management fee and no incentive fee. The way you will see this flow through the income statement in future quarters is our management and incentive fee expense line will represent the 1.5% and 17.5% fee structure and the waiver line, effectively a contra expense, which you will see listed after our expenses on our income statement, will reflect the portion of our fees that we are waiving. This fee waiver is effectively our ability to make special dividend payments, which I'll hit on in a moment.
For the third quarter of 2019, our Board had previously approved a dividend of $0.31 per share, which we think of as our long-term fixed dividend. Our Board set this dividend with a long-term view at a level which we felt was very achievable, a safe conservative dividend level. Our Board has also approved a series of 6 consecutive quarterly special dividends. You can see a picture of our dividend structure for the next 1.5 years on Slide 14 of the earnings presentation.
Let me take a moment to explain all of this for anyone new joining us on our call today. Our special dividends, effectively the fee waiver I just mentioned, is the light blue shaded portion of each bar on this slide. These start in the third quarter of 2019 and run through and include the fourth quarter of 2020. For the third quarter of 2019, the special dividend is $0.02 per share. For the fourth quarter of 2019, the special dividend is $0.04 per share. And for each quarter in 2020, the special dividend is $0.08 per share per quarter.
As you can see, we provided ourselves a ramp with our special dividends from the third quarter of 2019 through the first quarter of 2020 as we ramp back to our target leverage ratio. Again, all of these special dividends have already been approved by our Board of Directors for shareholders of record as of the last day of each quarter.
Okay. Now to talk about our financing landscape and liquidity for a moment. As we have previously discussed, we have not opted to increase our regulatory leverage limit. So we are still operating under the regulatory cap of 1x debt to equity, and our target leverage is 0.75x debt to equity.
We operate the right side of our balance sheet under 3 key guiding principles. The first is diversification, as important on the right side of the balance sheet as it is the left. We focus on maintaining diversification by the number of financings we have in place, the types of financings and the number of lenders. As you can see on Slide 13, we are very diversified by number and types of financings. We also have approximately 50 lenders across these financings. So very diversified and not beholden to any one lender.
The second is match duration. As you can see on the right side of this slide, the vast majority of our debt maturities for 2024 and beyond matched well with the left side of our balance sheet. And the third is match interest rates. Since basically all of the left side of the balance sheet is floating rate, the right side of our balance sheet is also floating rate. So therefore, when we have done fixed rate financings, like our unsecured bond issuances, we swapped them back to floating.
Now to get into the numbers. Our average debt-to-equity ratio for the 3 months ended June 30 was 0.65x. We calculate our average debt-to-equity ratio by using daily debt outstanding. And for equity, we start with our prior quarter end net asset value and adjust on a daily basis for equity issuances, which historically would be capital calls from our private base investors and DRIP issuances.
As of June 30, our reported quarter end debt-to-equity ratio was 0.24x, a reflection of the cash proceeds received from our final capital call of $1.6 billion towards the end of June, which we used to temporarily pay down outstanding secured debt.
Based on net deal fundings in July, we are on track and well on our way to starting to lag back into our target leverage of 0.75x debt to equity. We do estimate it could take approximately 9 to 12 months to get back to our target leverage, but we have made good progress so far.
Craig touched on repayment pace earlier. So to remind everyone, repayments have an impact on earnings in 2 ways, both on lagging back into leverage as well as the earnings boost from accelerated amortization of upfront fees and call protection. As it relates to our credit facilities, we were very active this quarter. We did both the CLO takeout from SPV Asset Facility II and an unsecured public bond issuance. Both of these financings were very well received by the market.
We amended and upsized our revolving credit facility, increasing total commitments from $600 million as of March 31 to approximately $1.1 billion as of today, inclusive of lender closings post quarter end. We have an uncommitted accordion feature to our revolver, which would allow us to increase the size of this facility up to $1.5 billion over time.
And finally, we terminated our subscription credit facility. This facility was collateralized by the unfunded commitments of our private base investors, and those commitments were fully funded this quarter when we did our final capital call in June.
Our average dated interest rate on debt outstanding was 5.5% for the second quarter. Taking a step back, as you can see all the different financings we've put in place here, we have as much access to capital as just about anyone else out there, access and size. Our cost of debt is evolving due to this, so our costs here will go up a little in the short term as we lose the inexpensive subline but we expect over time will then come down.
So to wrap up with a few other items and reminders. We have 4 investment-grade credit ratings from S&P, Fitch, Moody's and Kroll. These ratings provide us the ability to continue to execute in the debt capital markets as we did with our unsecured public bond issuance during the second quarter. We would expect the bulk of future financings to be CLO financings, CLO takeouts from our SPV drop-down financing facilities and unsecured public bond issuances. We have a significant amount of available liquidity. We can borrow over $1.7 billion under our secured financings as of June 30. That is clearly a significant amount of liquidity to be able to operate under and gives us an advantage in the market.
We have put in place a solid foundation of financings, and we intend to continue to access the capital markets as efficient and flexible sources of financing. As you can see, our unsecured public bonds are trading much tighter versus where we've priced them.
In connection with our IPO, we instituted a 10b5-1 buyback program. This program goes into effect shortly and is a programmatic plan, it's not discretionary, and it's not subject to blackout windows. The plan is administered by Goldman Sachs and starts buying a share of the average daily trading volume below NAV. The size of the plan is $150 million and is for an initial 18-month term. We take this buyback plan into consideration when we review our target leverage and liquidity profile.
Thank you all very much for your support and for participating in today's call. Craig, back to you.
Thanks, Alan. On the heels of the successful completion of our IPO, we are pleased with our results this quarter and are excited to continue to deliver strong returns for our shareholders. As Alan noted, we had strong originations this quarter, and we'll continue our work to build the portfolio back to our target leverage while remaining laser-focused on our credit discipline.
In terms of the direct lending market, we continue to see a very competitive market environment as was the case in Q1, which is in large part due to the strength in most asset classes and especially the public high yield bond and leveraged loan markets. Therefore, we are maintaining our cautious approach as we continue to build our portfolio.
We remain focused as always on evaluating as many transactions as possible in order to identify the right opportunities for our shareholders and continue to be highly selective in our capital allocation. Our credit approach is focused on the long-term preservation of our shareholders' capital and generating attractive risk-adjusted returns. And right now, we have what we believe to be a conservative bias in the portfolio with over 80% first lien investments and over 98% senior secured investments at quarter end.
To wrap up, the first half of 2019 was very strong for Owl Rock. We are proud of what we've accomplished but remains steadfast in our focus on maintaining our credit discipline and the overall quality of the portfolio as we look to build on our progress. We are pleased with the outcome of our IPO process and believe we've given our shareholders meaningful visibility into our returns over the next 6 quarters through our previously declared special dividends.
On behalf of myself, Alan and the entire Owl Rock team, I want to close by thanking everyone again for your time today and for your investment in Owl Rock. We look forward to maintaining an ongoing dialogue and keeping you apprised of our progress.
And with that, operator, please open the line for questions.
[Operator Instructions] Your first question comes from the line of Chris York with JMP Securities.
So first, I'll just lead by expressing my congratulations on the successful completion and trading of your IPO, which I think does put you in the world class of BDCs that have performed well out of the gate.
My first question is on leverage. So you've communicated a balance sheet leverage ratio target of 0.75x over the next 2.5 years and don't plan to ask neither the Board nor shareholders for access to additional leverage. Now this plan is different than other BDCs who are seeking higher leverage. So the question is, are there any scenarios that could cause you to change this view and ask for additional leverage when you reach your target over the next 12 months?
Sure. So we've thought a lot about this as we've evolved, and we've continued to share our thinking as things have evolved. We -- from the beginning, we've been focused on maintaining our 0.75x leverage ratio. We think -- and first of all, we've been able to generate very attractive returns to our shareholders with that leverage ratio. And so there hasn't been a catalyst to try to increase it. We very much like having access to the investment-grade bond market. We obviously just got those ratings over the last 18 months. And they're our first bond offering. And so we're very cognizant. Obviously, our leverage target ratio affects our ratings and affects our access to that market, and we would be very reluctant to do anything that would jeopardize those.
Obviously, leverage ratio has been an evolving topic in the industry, and even in the last year or so, with the change in the rules and the change in how the rating agencies looking at things and the changes in how some of the other managers have behaved, there's been an evolution there. Right now, and this is obvious, we're under-levered. And we've got a lot of work to do just to get back to our 0.75. And I know you're acknowledging that in your question. So for the near term and foreseeable future, we're focused on building the portfolio and getting it back to 0.75 with a focus on credit quality.
To your question, is there a chance that we would ever revisit that? Of course, I would never rule that out. As we approach full leverage, we can always take a look at things and decide at the time if there's a scenario where it's beneficial to our shareholders and done in a way that's sensitive to the rating agencies, sensitive to our bondholders and overall improves in our cost of capital at that time. And that time, again, we've said is at least 9 to 12 months out, then we would take another look at it, but that's not something that we're pursuing right now.
Got it. That's helpful. Switching gears a little bit, Craig. As you are aware, there are some direct money competitors that have expressed caution about your asset growth over the last 4 years. Now in our conversations with investors, they're trying to figure out if these comments include some envy about the share you guys have obtained or whether you are taking additional risk to obtain the growth. So could you maybe just speak to a couple of points about either your underwriting or portfolio today that you think investors should focus on to take comfort about your portfolio quality and then the growth?
Sure. Look, we're recognized as a new entrant and one that is the second largest publicly traded BDC. For folks that are not sitting through our investment committee or a part of our process, there'd be a question there, and we understand that. And whether it's envy or just lack of knowledge, we appreciate where that might be coming from.
We're really confident that the quality of the portfolio that we're building is extremely high. And I'm not -- when I say that, I don't mean satisfactorily high. We think we have one of the highest-quality portfolios in the space. It starts from the kind of companies that we lend to, middle to upper middle market. We talked here $75 million plus of EBITDA. These are big companies. They're important. We think they're well positioned to withstand an economic cycle, and you can see the sectors that we lend to, they're noncyclical sectors like food and beverage, health care and software. We do deals that have significant equity sponsor capital beneath us. Most of our portfolio is sponsor-driven. We've said on the road, directionally about 50% of the capital structure in our typical loans is equity. The portfolio is 80% first lien. I think that's as high as anyone in the space.
And our performance has been stellar. We don't have any losses. We have no nonaccruals. We have no defaults. You can see our categorization. I'm happy to comment on that, but we think it's in line with other people in the space. But even more to the point, really confident that when I say we have no nonaccruals and no losses, that that's not something we expect to change soon. So I think the facts speak for themselves, and we feel confident we'll continue to do that.
I'll just make one last comment. It's not directly answering your question, but we think that the competitive dynamic that we're focused on is not so much the other lenders. It's the syndicated market. Our value proposition, the sponsors put up against what they can get in the syndicated market. So in periods of market volatility, our penetration of the overall leverage finance market will go up.
Typically, and I've said this, and I -- for those of you who've heard me say it, if a sponsor has a deep relationship with us and another direct lender, the sponsor typically would like to include both of us in a transaction. And so I don't -- I know it not to be the case that we're winning deals at the expense of another good relationship over some aggressive set of economic terms or structure. We care a lot about covenants. We care a lot about structure. But we've grown, and I would say that's come at the expense of the public leveraged finance markets, not so much some of the other platforms, many of which are smaller and not really relevant to the kind of deals that we're doing.
Got it. That color is very helpful, and I think that distinguishment is very important as well. Last question, then I'll jump back in the queue. Could you provide us some color on the backlog or pipeline quarter to date? And then you talked a little bit about the repayment visibility may be decelerating quarter-over-quarter, but is there anything in there that you could see in the month of July here like TransPerfect for Q3?
Sure. Okay. I'm -- I'll just make some directional comments. I'm not going to put specific numbers to it, but directionally, we have a very strong pipeline now not only for deals that have closed already this quarter but also deals that we are committed to and have pretty significant visibility that we expect to close by the end of the quarter. So sitting here right now, our activity level, if it were to play out as we expect, would be greater than the second quarter, although of course deals can fall away at the last minute. But it's in excess of our second quarter based on our current visibility, and we're just here at very late, late July or early August.
In terms of paydowns, I signaled this in my comments, sitting here right now, if nothing else changes, paydowns would be less than what we experienced in the second quarter. We don't have a large deal like TransPerfect that we expect to have paydown. But again, I'd try to address this. We don't have great visibility, and that can change quickly. And so it's possible that it could be greater by the end of the quarter. But right now, originations are running ahead, repayments are a bit lower.
Your next question comes from the line of Finian O'Shea with Wells Fargo Securities.
Congratulations as well on the IPO and inaugural quarter. I'll just ask a couple on allocation. Craig, you mentioned that you have other platform vehicles and only a portion of the paper will go into ORCC. Can you give us some outline on how you treat technology originations given obviously one of your BDCs is dedicated to that strategy? Is that something ORCC will share with? And what -- is there sort of an upper boundary on tech in the Owl Rock portfolio?
Sure. So maybe quickly just because someone on the phone may not have the context. I mentioned we manage 4 funds, ORCC. There's a second fund, ORCC II, which is really comparable to ORCC, except we're raising that money in the retail channel as opposed to the institutional drawdown channel. But the list of investments in ORCC II is almost identical to ORCC 1, the position sizes are just smaller. We have a third BDC, which Fin is referencing, which is our tech BDC. And then the last fund is a senior lending fund, which is only doing through first lien term loans. It's not doing unitranche or second lien. So those are the 4 funds. We have a very rigorous allocation policy on how we allocate between the funds. And I made the comment that I think having all 4 funds under one roof is very advantageous.
In terms of tech, so any deal that's appropriate for any one of the 4 funds, a portion of the deal will go into those funds. And so -- and the denominator, if you will, is essentially available capital. So you could think of it, just simplistically, as a pro rata piece in each of the funds based on available capital. Obviously, each fund's available capital go up and down over time.
When it comes to tech, I mean the reason we started a tech BDC is we were seeing a significant amount of our deal flow in the tech arena. And when I say technology, I really mean, in particular, software, software buyouts. It's a very active space for sponsors. We really like software buyouts. The credit characteristics are very attractive, extremely low LTV, high recurring revenue, high margin, so we can talk through all that. But we did not want to have ORCC inadvertently become over concentrated to software and to tech. And we characterize deals in ORCC, if it's tech or software, we call it tech or software. I don't know if that's a common practice in the industry, but we think that's the right way to do it.
So we started the tech fund, in part, so we had capacity to do attractive deals that we were seeing, but so that we would avoid having ORCC become too concentrated in technology. So when we're doing, in particular, software unitranche, or software first lien, software second lien, you should expect that to go into the tech fund in ORCC and ORCC II unless it's just a true first lien -- not in the first lien fund. Over time, as the tech fund is growing and as ORCC is getting more fully invested, the percentage we're going to put in ORCC is going to decline. We don't have a hard rule on this. Our biggest sectors stay around 10%. I think that we view -- we would comfortably go above that. I would say, and don't hold me to this, but directionally, 15%, 20% in that ZIP code, but don't hold me to that, but just so you have some frame of reference.
The last piece I would say is a strategy in the tech BDC, 75% of it is sponsor buyout financing, essentially. The other 25% is what we call yield-enhanced investing. This is lending or investing in privately held technology businesses, in more structured capital with a higher return but a different risk profile, could be preferred, could be convert, could be some type of structured equity.
Those types of investments, we would not expect to put in ORCC. We don't think it's commensurate with the risk profile of ORCC. So investments like that, we would expect to just go into the tech fund. Sorry for a long answer, but I wanted to just kind of cover all that at once.
And then just one more on origination. You guys outlined in the filings that you may take certain origination or upfront fees. Can you just sort of describe the essence of this practice? What level of fees will go to the adviser? And then on what kind of deals? Will these be on the larger deals where you're more competing with the syndicated market or the smaller core middle market deals?
Sure. So in certain very specific circumstances, and we've been transparent about this, we do take fees in certain circumstances and it's disclosed in our filings. Whether we take a fee is driven by whether we're providing certain services to a borrower, such as structuring a loan or advising on the capital structure. And in those cases, Owl Rock, the manager will directly negotiate with the borrower for a separate fee that is paid from the borrower to Owl Rock for those services. This is separate from upfront fees or OID that the fund would receive in exchange for providing the loan. So if you look at our schedule of investments, I know you've done some math on this. Our math was slightly different, but I think, basically, the same answer. If you do the calculations, you'd see ORCC is receiving on average 1.8% fees. And any arrangement fees going to Owl Rock, the manager would be separate from that.
So what you're seeing in our disclosure is about 1.8%, and then any fees are negotiated and separate that go directly from the borrower to the manager for services rendered and documented in that manner. And then we take the OID -- just for completeness, we take the OID that ORCC is getting, we amortize that over the life of the loan. We're not making a judgment about what type of deal to take it on. The fee is being given for services that the manager is providing to the borrower.
Your next question comes from the line of Mickey Schleien with Ladenburg.
I wanted to start by asking about LIBOR. Obviously, it's down another maybe 5 to 10 basis points this quarter. I'd like to understand how common are LIBOR floors in your typical deal given that you're lending to larger borrowers and many other BDCs. And what is the average LIBOR floor in the portfolio?
Sure. So LIBOR floors are very common in our portfolio. And I'd have to go look at it, but it's north of 85% have LIBOR floors at typically 1%. We typically have them -- when LIBOR spiked over the last 18 months, the syndicated market, the banks started to take out LIBOR floors for the -- in the syndicated deals. So the syndicated market, it's a mix. We try to insist on it and almost always get it, and we'll continue to do so and expect it to be 1% and not more than that. Obviously, we like that. We like -- we're glad we have them. We want to have them, and it's a point of focus on our part because as we say, we do compete syndicated market, which occasionally -- which oftentimes will not have it.
By the way, I would expect that to get changed. Now that LIBOR is going back down, I wouldn't be -- I would expect the CLOs and mutual funds to start to push back on that. So I think that was your question.
My next question regarding the outlook for G&A. Given the IPO in the third quarter, is it reasonable to expect higher G&A at least for 1 quarter given accruals for the professional fees that were associated with that?
Hey, Mickey, it's Alan. A lot of the IPO expenses go directly through equity. So I don't think you're going to see a material change in the other operating expense ratio. I guided to mid-20s to low 30s. We're operating at 27 basis points on a trailing 12-month basis. I -- we're right in the center or below the center of the range there. I don't think you're going to see material movement there. You're not going to see a pop.
Okay. I understand. And my last question, Alan, I appreciate Slide 7. I just want to make sure I understand it. The line with interest -- with the fee line of $11.6 million, that's about 2% of the exits for the quarter. Does that roughly break down to half prepayment fees and half acceleration of OID?
So that's a great question, Mickey. It's about 1/3 and 2/3, give or take, or it's about 40% and 60%. So the prepayment fees are about $4.5 million, and the accelerated amortization is about $7 million.
But give or take then prepayments fees in the neighborhood of 1%. Is that fair?
I mean just in this quarter. I mean when we underwrite deals, we typically will have 1 to 2 points of call premium. And so -- but that is reduced over time. Oftentimes, it might be 102 per year, 101 per year. And then par, sometimes it's 101 par. And so depending upon when the loan gets repaid, that will generate what the actual premium is, in this case, it was repaid during the -- where there is call protection. And so that's why you're seeing it. On other loans, we may be through the call period.
Your next question comes from the line of Michael Ramirez with SunTrust.
I guess in your prepared comments, you mentioned the leverage loan market remains competitive, which is obviously in line with everybody else in the marketplace. But you've consistently managed to fund new gross originations at a greater pace than the prior year. So I guess my question is, to accomplish this feat, are you closing on a higher rate of deals seen? Or does your size and scale sort of afford you to look at a majority of the deals in the marketplace and remain selective?
I was trying to follow the front part of your question. I mean our origin -- our commitments this quarter and last quarter were meaningfully lower than they were in the third and fourth quarter of last year although still high. So I just want to make sure we're all covering the same thing.
So -- but to get at the spirit of your question, look, we've made a big investment in our team. We have deep relationships, and we have a large flexible pool of capital. And those are the 3 reasons why I think we have a terrific competitive advantage. I still think that we -- our platform is still hitting its stride, and we will continue to be a financing source of choice. There are sponsors that we've worked with a lot, and there are some sponsors we haven't had a chance to work with at all. And we believe when we work with a sponsor, they're going to want to work with us again.
Our strategy, look, it's simple. We want to see everything and only do the deals we really like. And that hasn't changed in any quarter since our inception. And as the pool of capital has grown and as our relationship building has grown, I just think we've been more successful.
I also think that as we've had these other funds, our ability to be in that sweet spot of $200 million to $600 million in underwriting size has really been beneficial. There are, particularly in M&A, circumstances where a sponsor likes to work with one party that can structure a loan, and we're one of a select few that can do it. And so I think that we're -- as I said earlier, I think that the deals we're doing are deals that many lenders just couldn't do. They're too small. It's not that we're taking it from them. They're too small. And they're deals that we're essentially taking from the syndicated market that would have otherwise gone as syndicated deal instead of going direct.
And TransPerfect, just to hit on it because it was -- that was a deal that any bank would have loved to have underwritten, we've worked with a client for 6 months in a highly complicated M&A process, but we had to cap it at $425 million commitment that we can have outstanding for a long period of time, and they like being able to work with one financing source.
Okay. Great. That was helpful. And I guess just a quick follow-up on that one. When you are passing on deals, what are some characteristics you're trying to avoid? And how has this changed from the prior year?
Sure. No change. I mean there's a lot of reasons why we say no to a deal. I -- when we say no -- we say -- when we say our hit rate is less than 5%, I say this somewhat jokingly, but we're turning deals down as fast as we can, right? We're saying no to almost everything we look at. Reasons we say no, company too small, company not established enough, company's market position too weak. We're very -- we like recession-resistant businesses, so we're very cautious on cyclicals especially at this point in the cycle. It doesn't mean we wouldn't do cyclicals, but we're not going to be very aggressive on the leverage REIT. EBITDA adjustments are a big topic in the market. We're very diligent about underwriting EBITDA. And so we may look at a company we like a lot but have a different view of what the cash flow is and therefore be less competitive lever -- from a leverage standpoint.
But I think in essence, it's really the business that we're being asked to finance more than anything. We try to do that really efficiently early, so we don't waste our time. I'd also say it tends not to be about the last 25 basis points of rate. We don't -- although we would prefer to have 25 basis points of rate rather than not, it's hard for us to find companies we really like. I know we've put a lot of dollars out. But we've said no, we say no all the time. When we find a company we really like and think it's going to be a great 5- to 7-year investment, 25 basis points upfront is not going to be a driver of our decision-making.
That's helpful. And one last one if I may. Have you guys provided a spillover income number?
I did not in my remarks. Our undistributed distributions is $0.09 per share, and that's inclusive of the IPO shares.
Your next question comes from the line of Robert Dodd with Raymond James.
On -- just digging into portfolio structure, if I can, just a little bit more. Obviously, you just disclosed 81% of the investments are first lien. There's a pretty wide range of structures that the docs can call first lien, and they're not all are the same. So can you give us any more color on the breakdown within that 81%? I mean what you would have called first lien, say, 5 years ago versus what's called first lien today or unitranche or last out, all of which are technically first lien?
And then within that as well, kind of what's your appetite for maybe shifting that mix or what you're seeing in the market by those broader categories? I mean maybe you can't be precise on those categories, but any color would be appreciated.
Sure. So -- and I'm going to use round numbers. The book is about 80% first lien. And of that first lien, about 35% is unitranche, and about 45% is what we think of as either true first lien or stretch first lien. These are terms of art. There aren't rigid definitions to it. We're giving you our best judgment based on the risk of the underlying loans. Unitranche simplistically is where we're going through a leverage level that we're attaching $1.01, but we might be leveraging to the point that's more commensurate with the second lien investment. And so when I say first lien or stretch first lien, we're talking about 35% to 45% loan-to-value and 4x, 4.5x leverage. These are directional. I'm just trying to give you a sense. And 20% of the book is second lien.
I don't think -- we don't -- we generally don't -- I think we have one investment in the portfolio where there's a first out. So when I say unitranche, in all cases, except one, we hold the entire unitranche and have not sold a first out position. And so while the leverage is higher for sure, we're not -- we're attaching $1.01. In terms of where might we go from here, look, the 45% first lien and stretch first lien, we think, is an indicator of a conservatively built portfolio. And I tried to highlight this on the road show, I think it partly helps explain how we've successfully invested the kinds of dollars that we've invested in a competitive environment. We just think we're putting on some sizable attractive, a little bit lower yielding, but very safe first lien term loans. And that's been deliberate because we wanted to invest our shareholders' money but do it in a way that's safe. And that -- and we've been ramping over the last 3.5 years.
As we approach getting fully invested over the next 9 to 12 months, I believe we will have the opportunity to -- as some of those loans come off, to rotate some of them into unitranche or potentially second lien, but only if we like the credits, not to generate return, but we'll have the -- we'll have a bit more flexibility to stay closer to fully invested and wait for the unitranche we really like when we get to closer to fully invested. I won't put numbers to it, but when we started, I would not have expected us to be 45% first lien and stretch first lien. And I think that we will have some benefit from mix shift.
On second lien, we've been super selective on second lien. We like second lien. If it's a credit, we like to do upper middle market, stable businesses with significant equity cushions for second liens. If we see opportunities that have those characteristics, we will do second liens. We're really at a low point now. And so I would expect that to go up as well, not necessarily in the very immediate term, but over time. I would say just one last comment, and I don't want to make too big a deal of this, in the last 30 or 45 days, the syndicated market has been a little softer. Second lien syndications have not gone as smoothly as banks had anticipated. And so we're seeing increased inquiry from sponsors wanting to prepay -- play second liens, and so we like getting those calls, and we'll be selective about the ones that we do.
Okay. I really appreciate that color. And then one sort of also related to portfolio. Obviously, it looks like the Fed may cut rates later today. And the expectation is because obviously, growth may be slowing down a little bit. Have you got any data that you can share with us on EBITDA or of looks at the underlying portfolio companies, where it is today versus where it was, say, 12 months ago?
Sure. Look, we -- what we're seeing in our portfolio companies is very modest growth in revenues and very modest growth in EBITDA, low single-digit growth. So we're not seeing a slowing. And we're not seeing companies shrinking their revenues, but I would say a modest growth environment and modest EBITDA growth, which is an okay environment for us. I think you're not necessarily seeing the kind of growth the sponsors would like and what they're making their investment equity -- equity investments on. But our portfolio is doing well from a growth standpoint.
Gentlemen, your final question comes from the line of Casey Alexander with Compass Point.
I think you guys need to be given kudos for the manner in which you handled the IPO and some of the IPO protections that you've put into place. I am curious that with a BDC that has a $5.9 billion market cap but also really has $150 billion market cap, and I'm mindful of the fact that your institution's just put in a quarter of that capital in the most recent capital call, but at some point in time, these lockups are going to come off. And I think you guys are responsible stewards of capital. How do you plan to manage the process of expanding the float of the BDC to allow for orderly trading of your institutional pre-IPO clients?
Sure. Look, we're -- and Alan can comment on this as well. Look, we're in touch with our large shareholders all the time and have been for 3.5 years. While this is our first public call, we talk to our large institutional shareholders in this manner consistently throughout. And we think that they're really pleased with their investment at Owl Rock, and our returns have been terrific. And I'd like to say that they would deliver on what we said that we're going to do, and we'll continue to do so. As you noted, we did a number of things in this IPO to make sure the IPO is successful. We've also done things that benefit our existing shareholders that candidly they were not expecting. And it was to their benefit.
So I think we've continued to treat them extremely well, and we expect to have their support for the foreseeable future. Obviously, every investor has to make her own decision. But obviously, this was the game plan from the beginning. We talked to our investors about the IPO and what that would mean. And we expect the vast majority of them to remain shareholders with Owl Rock and the float will grow as the lockup comes off just by virtue of a lockup coming off.
We, Alan and I, as you know, we're not shy about going out on the road and telling the story, and we'll continue to do that. We made a great effort in -- through this IPO to expand the universe of folks that invested in BDCs. I think we were successful at doing that. And so we're going to continue to tell our story and hope to have additional shareholders take a look so that there remains great demand for our stock and -- for now and the foreseeable future.
This concludes our question-and-answer session. I will now turn the call back over to Craig Packer for closing remarks.
Okay. Well, look, everyone, thanks for dialing in to our first call. Thanks for the questions, and we look forward to speaking with you again soon.
This concludes today's conference call. You may now disconnect. Thank you.