FS KKR Capital Corp

NYSE:FSK

Earnings Call Transcript 2020-Q4

[Operator]

Good morning, ladies and gentlemen. Welcome to FSKKR Capital Corp's Fourth Quarter 2020 Earnings Conference Call. Your lines will be in a listen-only mode during remarks by FSK's management. At the conclusion of the company's remarks, we'll begin the question-and-answer session, at which time, I will give you instructions on entering the queue. Please note that this conference is being recorded.

At this time, Robert Paun, Head of Investor Relations will proceed with the introduction. Mr. Paun, you may begin.

[Robert Paun, Head, Investor Relations]

Thank you. Good morning and welcome to FSKKR Capital Corp's fourth quarter 2020 earnings conference call. Please note that FSKKR Capital Corp may be referred to as FSK, the Fund or the Company throughout the call. Today's conference call is being recorded and an audio replay of the call will be available for 30 days. Replay information is included in a press release that FSK issued on March 1, 2021. In addition, FSK has posted on its website, a presentation containing supplemental financial information with respect to its portfolio and financial performance for the quarter ended December 31, 2020. A link to today's webcast and the presentation is available on the Investor Relations section of the company's website under Events and Presentations. Please note, that this call is the property of FSK. Any unauthorized rebroadcast of this call in any form is strictly prohibited.

Today's conference call includes forward-looking statements and we ask that you refer to FSK's most recent filings with the SEC for important factors and risks that could cause actual results or outcomes to differ materially from these statements. FSK does not undertake to update its forward-looking statements unless required to do so by law. In addition, this call will include certain non-GAAP financial measures. For such measures, reconciliations to the most directly comparable GAAP measures can be found in FSK's fourth quarter earnings release that was filed with the SEC on March 1, 2021. Non GAAP information should be considered supplemental in nature and should not be considered in isolation, or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similarly named measures reported by other companies. To obtain copies of the company's latest SEC filings, please visit FSK's website.

Speaking on today's call will be Michael Forman, Chairman and Chief Executive Officer; Dan Pietrzak, Chief Investment Officer and Co-President; Brian Gerson, Co-President; and Stephen Lilly, Chief Financial Officer. Also joining us on the phone are Co-Chief Operating Officers, Drew O'Toole and Ryan Wilson.

I will now turn the call over to Michael.

[Michael Forman, Chairman & Chief Executive Officer]

Thank you, Robert, and welcome, everyone, to FSKKR Capital Corp's fourth quarter 2020 earnings conference call. Given the enormity of the events which occurred during 2020, we continue to feel humble as we gather to discuss our financial and operating results. We also acknowledge that while there are compelling reasons for many in the world to have hope for return to normalcy, the world never will be the same for those whose lives have been directly impacted by the effects of COVID-19.

The fourth quarter of 2020 was without question a positive quarter for FSK. During the quarter, our investment teams originated approximately $613 million of new investments. We experienced an increase in our net asset value, and we again out earned our target 9% annualized dividend yield on our net asset value.

In addition to these successes, we announced the proposed merger of FSK and FSKR, we amended our senior credit facility to extend its maturity by one year, and we access the public markets becoming only the third BDC in the history of the industry to raise $1 billion or more in a single unsecured debt offering. We access this debt capital on extremely attractive terms, thereby not only fortifying our balance sheet, but also locking in attractive long-term cost of capital.

From an operating perspective, our adjusted net investment income was $0.72 per share for the fourth quarter, which was $0.12 per share above our quarterly dividend of $0.60 per share, and also $0.08 per share above our public guidance at the end of the third quarter.

From a liquidity perspective, we ended the quarter with approximately $1.4 billion of available liquidity with no meaningful near-term debt maturities. Looking forward, we expect our first quarter net investment income to approximate $0.61 a share. As such, our Board has declared a distribution of $0.60 per share for the first quarter, which equates to an annualized yield of 9.6% on our net asset value of $25.2 as of December 31, 2020.

While we continue to believe a 9% annualized dividend yield is achievable, we acknowledged that should competitive pressures and spread compression occur to the point that such a yield is not achievable, then our investing focus will continue to be protection of principle first, with yield second.

From a merger perspective, we anticipate the proxy solicitation period will begin this month and will conclude at each of FSK's and FSKR shareholder meeting scheduled for May 21 2021. We would expect the proposed merger to close shortly after receiving approval by FSK, and FSKR shareholders and other customary closing conditions. Assuming the timeline remains as scheduled, we expect the proposed merger to close during the month of June.

As we turn to 2021, we do so not only with gratitude for the many accomplishments of our team over the last year, but with enthusiasm for what is to come as we plan to combine FSK and FSKR. This combination will create a single BDC with a size, scale, market reach, balance sheet strength and investing discipline to become a premier provider of capital to companies operating in the upper middle market.

And with that, I'll turn the call over to Dan and the team to provide additional color on the market and the quarter.

[Dan Pietrzak, Chief Investment Officer & Co-President]

Thanks, Michael. In our recent earnings calls, we have focused on certain macro observations. Our views that the high yield markets would continue to be robust, that the reemergence of corporate M&A activity would lead to a rebuilding of BDC investment pipelines, and that governmental intervention in the economy would continue are playing out largely as we expected.

As we move into 2021, we believe sustained governmental investment and spending on initiatives and education, infrastructure, health care, supply chain resilience and clean energy will continue to garner focus and attention. Combining these elements of governmental involvement in the economy with an expected rebound in consumer spending, inflation targeting by the Federal Reserve, and an outlook for operating companies which includes relatively easy year-on-year comps, we believe 2021 as many of the key ingredients to be a year filled with meaningful economic growth opportunities.

Within the BDC industry, we believe company and platform size increasingly will lead the way as strategic differentiators. According to a recent study by Dechert LLP, 49% of private equity firms surveyed reported that they utilize private credit interchangeably with the syndicated loan markets, and the same firms reported a 35% increase in their use of private credit over the last 3 years.

Statistics like these illustrate how competitive private credit alternatives can be when they are able to be delivered on a scale which is relevant to larger borrowers. We believe the KKR credit platform, which is one of the few platforms able to operate at such scale is poised to continuing attracting this new transaction volume thereby leading to more attractive long-term growth prospects.

As private credit continues to grow as a distinct asset class, our goal is to position ourselves as favorably as possible to capture more than our fair share of the corresponding increase in transaction volume. During the fourth quarter, the FSKKR Advisor closed on approximately $1.9 billion of total investments across our BDC franchise, $613 million of which were in or within FSK.

Despite the volume of investments we originated during the quarter, we remain very focused on structure and investment quality. Our closure rate as compared to transaction screened of under 3% during 2020, is actually a little bit lower than our historical closure rate of approximately 4%. In addition, approximately 60% of our FSK originations this quarter came from opportunities and companies previously invested in by KKR, illustrating the power of incumbency and our relationships.

Our $613 million of total investments combined with $498 million of net sales and repayments when factoring in sales or joint venture, equated to net portfolio growth of $115 million during the quarter. During January and February 2021, we closed $267 million in investments, and we experienced $346 million in repayments. While it's impossible to be precise, like other larger platforms, we do expect a higher than average level of repayments during the first part of 2021 given the elevated levels of liquidity in the syndicated markets.

A few quarters ago, we began providing detailed investment performance metrics for the FSKKR Advisor. The updated information is summarized as follows. Since the FSKKR Advisor was formed through December 31 2019, we have made approximately $3.2 billion of new investments in FSK, and we experienced 42 basis points of cumulative appreciation. And from the same starting point through December 31, 2020, we have originated approximately $4.5 billion of new investments in FSK and an experienced 44 basis points of cumulative appreciation.

We continue to be pleased with the investment performance our team has been able to deliver for the last 3 years. And we believe these data points continue to illustrate the manner in which we are turning the investment portfolio toward what we believe to be more conservative investment structures, and companies with more defensible operating positions. This information is detailed on Slide 12 in our investor presentation on our website.

And with that, I'll turn the call over to Brian to discuss some investment portfolio specifics.

[Brian Gerson, Co-President]

Thanks, Dan. As of December 31, our investment portfolio had a fair value of $6.78 billion consisting of 164 portfolio companies. This compares to a fair value of $6.65 billion and 172 portfolio companies as of September 30, 2020. At the end of the quarter, our top 10 largest portfolio companies represented approximately 22% of our portfolio, which remains in line with our results for the last several quarters.

We continue to focus on senior secured investments, as our portfolio consisted of 50.9% of first lien loans and 65.2% senior secured debt as of December 31. In addition, our joint venture represented 10.5% of the portfolio and our asset based finance investments represented 14% equating to an additional 25% of the portfolio, which is comprised predominantly of first lien loans or asset based finance investments which we believe have meaningful principal protection.

The weighted average yield on accruing debt investments was 8.8% as of December 31, 2020 as compared to 8.6% at September 30, 2020. In terms of color surrounding the repayments we experienced during the quarter, approximately 50% of our repayments were related to investments made by the FS KKR Advisor since its establishment in April 2018. While we dislike losing these assets, we appreciate the markets view of their quality.

One investment in particular was in AM General, which was originated in December 2016. AM General designs, engineers, manufactures and supports specialized vehicles for commercial and military customers, most notably the humvee military range vehicle.

We increased our investment in April 2018 by funding our pro rata share of a $75 million upside to the first lien term loan, which was used to revamp refinance the company's second lien term loan and in December 2018, again, increase our exposure via $160 million incremental first lien term loan, which was used to finance a shareholder distribution.

Over the life of our investment, with the help of the KKR Global Institute team, KKR developed a contrarian view on AM General and the sustainability of humvee demand. This allowed us to earn attractive economics on a well structured security, which benefited from both financial covenants and significant amortization.

Our $108.4 million investment was repaid in full during the fourth quarter as the company was sold. Another investment Athenahealth, was repaid during February of this year. Athenahealth is a cloud based IT health care technology company, offering electronic health records and revenue cycle management software to ambulatory and hospital companies.

In February 2019, we co-lead a $800 million second lien, and $600 million preferred equity investment to support the acquisition of the company by a group of financial sponsors. FSK's $113 million second lien, and $71 million preferred investments repaid in full pursuant to a comprehensive refinancing of the company's balance sheet. These types of investments and outcomes are exactly the type of investing model and track record we are seeking to build.

During the fourth quarter, we experienced net portfolio depreciation of $65 million. The total amount of realized and unrealized depreciation we experienced across the portfolio during the quarter was $175 million and are realized and unrealized depreciation totaled $110 million during the quarter.

As Dan alluded to in his comments, the roughly 50% of the investment portfolio, which is attributed to the FS KKR Advisor has recovered 100% of the depreciation we experienced earlier in the year due to COVID. We are pleased with these results, just as we are pleased with significant progress we made during the year restructuring, certain legacy investments and positioning the portfolio for future growth.

Finally, from a nonaccrual perspective, as of the end of the fourth quarter, our nonaccruals represented approximately 6.6% of our portfolio on a cost basis, and 2.5% of our portfolio on a fair value basis compared to 8% on a cost basis, and 2.8% on a fair value basis as of September 30. The decline in nonaccruals was due to the removal of three investments. Chisholm was sold, DI was restructured and Z Gallerie was exited. We did not place any new investments on nonaccrual in the fourth quarter.

And with that, I'll turn the call over to Steven to discuss our financial results in more detail.

[Steven Lilly, Chief Financial Officer]

Thanks, Brian. My comments will be framed primarily on the color behind our results, thereby hopefully framing them in a transparent and easily understandable manner.

First, the $16 million increase in our total investment income quarter-over-quarter was impacted by the following. We experienced an increase of $5 million in our interest income primarily due to the investment activity about which Dan spoke, offset by repayments of certain average yielding assets across our investment portfolio.

Our fee and dividend income increased by $10 million during the fourth quarter as compared to the third quarter. The largest components of our fee and dividend income included $19 million of dividend income from our joint venture during the quarter. As many of you know, we typically expect this recurring dividend income to approximate between $15 million and $20 million on a quarter-to-quarter basis.

Other dividends from various portfolio companies totaled approximately $11 million during the quarter as dividend paying portfolio companies continue to recover from the COVID related events of last spring. Finally, fee income totaled $12 million during the quarter, representing an increase of $9 million quarter-over-quarter. The increase was directly tied to our origination and repayment activity during the fourth quarter.

Our interest expense increased by $2 million during the quarter as we paid down a portion of our senior credit facility with proceeds from the $1 billion bond issuance Michael mentioned earlier, and the interest rates are slightly different between these two instruments. Management fees increased by $2 million during the quarter due to the higher amount of average gross assets during the quarter compared to the prior quarter.

The detailed bridge in our NAV per share on a quarter-over-quarter basis is as follows: our starting for Q 2020 NAV per share of $24.46 was increased by GAAP, NII of $0.63 per share, and was increased by $0.53 per share due to an increase in the overall value of our investment portfolio. Our NAV per share was reduced by our $0.60 per share dividend. The sum of these activities results in our December 31, 2020 NAV per share of $25.02.

From a forward looking guidance perspective, we expect our first quarter NII per share to approximate $0.61. The bridge from our $0.72 per share of adjusted NII during the fourth quarter to our first quarter guidance is as follows. A recurring interest income is expected to decline by approximately $6 million due to a combination of the following. Anticipated repayments of certain higher yielding assets during the first quarter. The effects of a lower origination quarter and the fact that there are two fewer days of interest income during the first quarter as compared to the fourth quarter.

We expect recurring dividend income associated with our JV to approximate $15 million during the first quarter. We expect other fee and dividend income to approximate $20 million during the first quarter.

From an expense standpoint, we expect our operating expenses, including interest expense, management fees, and G&A costs to remain relatively flat quarter over quarter. As Michael mentioned earlier, we continue to target a 9% annualized dividend yield on our net asset value per share, that we acknowledge there will be certain quarters where our annualized yield may be greater or less than 9% due to quarter-to-quarter fluctuations in the business from an operational standpoint.

That being said, we are pleased that during the last four quarters, despite the far reaching effects of COVID and the resultant volatility on most company's investment portfolios, we have been able to exceed our 9% target dividend yield.

In terms of the right side of our balance sheet, our gross and net debt to equity levels are 131% and 119%, respectively, as of as of December 31, 2020. This compares to gross and net debt to equity of 131% and 120%, respectively, at the end of the third quarter.

Our available liquidity of $1.4 billion equates to approximately 20% of the value of our investment portfolio, which remains a very comfortable percentage. A $1 billion bond offering in December provided meaningful additional ballast to our already strong balance sheet. At December 31, approximately 55% of our committed balance sheet and 70% of our drawn balance sheet was comprised of unsecured debt. We also continue to be pleased with our overall weighted average cost of debt of 3.9%.

In terms of debt maturities, we have no maturities until the middle of 2022. Our largest year of maturities is not until 2025 when approximately 45% of our capital structure will roll forward. As we move into 2021 and beyond. We believe our balance sheet construction represents a significant strength for our franchise.

And with that, I'll turn the call back to Michael for a few closing remarks, before we open the call for question

[Michael Forman, Chairman & Chief Executive Officer]

Thanks, Steven. As I referenced earlier in the call, we are in the enviable position of looking back at 2020 with a feeling of significant accomplishment. Like many companies, we experienced challenges. However, our management team was disciplined and forward looking. As we enter 2021, I'm extremely pleased with the performance of our investment team, the strength of our balance sheet, and the rotational dynamics of our investment portfolio which continue to improve.

As we look forward to closing of our proposed merger with FS KR later this year, the FS KKR franchise will become a single BDC with approximately $16 billion in assets on a pro forma basis as of December 31, 2020. In an industry, which is growing rapidly and becoming a major part of the U.S credit markets, I am truly excited by our long-term prospects.

And with that operator, we would like to open the call for questions.

[Operator]

[Operator Instructions] Our first question comes from Casey Alexander with Compass Point. Your line is open.

[Casey Alexander, Compass Point]

Yes, good morning. I have two questions, just more generalized First of all, looking at your new activity, I saw that 15% of new activity came in second lien loans this quarter, which is the first time that you've put some second lien back on balance sheet in a little over a year. Is that sort of a strategic thinking in terms of now hopefully having some economic tailwinds behind us? Or was it more idiosyncratically deal driven? That's my first question.

[Dan Pietrzak, Chief Investment Officer & Co-President]

Yes, good morning, Casey. I would definitely think about it is as more deals driven, right. I think there's points in time where the syndicated market for second liens could very well be shut, the private market alternative could actually be pretty strong, and we can get paid for what I would think about sort of attractive risks there. And when you also -- when we do think about second liens, we're thinking about even bigger companies that we're targeting on the unit tranche.

We're thinking about structures important, we're trying to get private credit terms into that document. We're all we're really forcing the overall structure to be covenant likes, we don't want a covenant in front of us, when we have a second lien. And then just another, we also -- we will take advantage of certain situations, one of the deployment names in Q2 was -- oh I’m sorry, in Q4 was a COVID impacted name. We thought the debt instrument was interesting, it was probably an 11% yield. Interestingly, it was a name those was actually already sort of taken out, but definitely deal driven.

[Casey Alexander, Compass Point]

Okay, great. Thank you. Secondly, Can you discuss, I mean, obviously, the fourth quarter deal market was fairly robust. Can you discuss how you see it rolling over into Q1? And also, if you could, give us some insights into some of the restructuring work that you guys did during the fourth quarter and subsequent, I think that would be helpful as well.

[Michael Forman, Chairman & Chief Executive Officer]

No, sure, happy to and then probably two questions in there, right. So, Q4 was definitely a robust quarter for us. And it gets all a bit of pent up demand catching up from things that may have been put on pause for Q2, and Q3, but I think we're very happy with the numbers that we see here, you see the overall kind of BDC franchises talked about in my comments, roughly $1.9 billion.

We feel good with where we sit with regard to the balance sheet of FSK, Q1, always a little bit slower, right. I mean, people are racing to get deals done before the holidays, before the end of the year that have to rebuild pipelines. So I would say, January, felt slow. In February, we've seen a rebuilding of pipeline, a rebuilding of deal activity, I think that's going to continue. I think '21 is going to be a pretty active year. I think the thing that we're just mindful about is the syndicated markets are pretty sort of rich right now and activity there is real. So I think us like others will see certain amount of repayments across the portfolio, but in some ways we'd expect that right and these as these companies grow as they're successful, they can access sort of those different markets. So I think that's the way we think about the activity levels. In terms of restructurings, probably the two biggest ones to point out. The first is a company called DEI. I would think about it as a high end speaker business.

[Dan Pietrzak, Chief Investment Officer & Co-President]

Very sort of consensual partnership deal with the sponsor. Of our existing debt, we put in new money to be supportive of what we view as a highly accretive acquisition they're doing. So that -- during the course of 2020 was, a pretty negative overall P&L event. But we think that company is quite well-positioned to go forward and actually has a real potential for a significant recovery versus the restructuring work we did. The second that I would note, which is Belk, FSK was mainly a second lien holder there, again, also a consensual deal.

We think that debt write off and hopefully reduced interest burden will allow that company to go forward on a productive basis. They were in and out of bankruptcy effectively in one day. So I think, Casey, those are probably the two biggest names. I think a lot of credit goes to the team on that. As we've talked about on prior calls, and we've built a dedicated workout function, considering the size of the portfolio, the ability to do these consensual deals, I think is having that team on board.

[Casey Alexander, Compass Point]

Thank you, Dan. I'll step out, let others ask some questions now. Thanks very much.

[Dan Pietrzak, Chief Investment Officer & Co-President]

Thank you.

[Operator]

Thank you. Our next question comes from Finian O’Shea with Wells Fargo Securities. Your line is open.

[Finian O’Shea, Wells Fargo Securities]

Hi, good morning. Thanks for taking my question. First on the dividend, Steven, I think you were talking about the 9% target. Can you remind us if you're intending to refix that post-merger or will it still be variable somehow? And if so, can you provide more color on the sensitivities, or what drives the variability? Will it be unrealized appreciation or is it more interest income over the line income statement type drivers?

[Dan Pietrzak, Chief Investment Officer & Co-President]

Sure, then -- Steven, you take that [indiscernible].

[Michael Forman, Chairman & Chief Executive Officer]

You go ahead, then.

[Dan Pietrzak, Chief Investment Officer & Co-President]

You take it.

[Steven Lilly, Chief Financial Officer]

Oh, okay. Okay. Fin, thank you. I would say in terms of post merger, we have not made any definitive conclusion on whether the strategy that we're utilizing now will carry forward. I think, despite any additional announcement, you should assume that it will. But obviously, we will evaluate the market at that time. I would note for you that, if the merger were to close today based on the guidance that we have given, then we would be -- that would equate to $0.60 dividend for the combined -- for the combined entities of $0.60 of NII, I should say.

As we think about how we calculate on a quarter-to-quarter basis whether to pay exactly 9% of our -- on an annualized basis of our NAV, we take into account the NII we've generated in the quarter. And if there's a surplus there, we sort of think about paying 95% of that surplus, somewhere less than 100 Although, as we sit today, we feel pretty comfortable where still back is so we can be a little more aggressive there than perhaps some folks.

And we also obviously take into account what's going on within the portfolio. And as we think about as the NAV changes, if it moves off over time, we certainly will wait into that and what are the components of those changes. So it's frankly a lot of what you said does go into the calculation on a quarter-to-quarter basis in different ways. But again, if you look at us as well as some of the peers that we have in the industry, I think a 9% annualized yield on one's NAV is a very reasonable target and as Michael said in his comments, we think still achievable in today's market.

[Finian O’Shea, Wells Fargo Securities]

Okay, great. And then a question for perhaps Michael or Dan or anyone on as you hopefully conclude the surface care merger and energy assets, may be stabilizing is an eventual FSEP combination something on the table for you if the right conditions are in place.

[Dan Pietrzak, Chief Investment Officer & Co-President]

Yes, Fin, I’ve to take that. If Michael wants that, do it. That's good. Yes. I think that's not something that like we're used to contemplating at this time. I think there's a broader question around sort of energy we've -- we ran the business historically pretty light on energy credit. I think there's a lot of reasons to think that there could be an opportunity there. I think oil prices up, 60% odd, but I think there'd be a pretty high bar just for the overall sector for us.

[Finian O’Shea, Wells Fargo Securities]

Okay, thanks. That's all for me. Congrats on the quarter.

[Dan Pietrzak, Chief Investment Officer & Co-President]

Thank you, Fin.

[Michael Forman, Chairman & Chief Executive Officer]

Thank you, Fin.

[Operator]

Our next question comes from John Hecht with Jefferies. Your line is open.

[Dan Pietrzak, Chief Investment Officer & Co-President]

John, can you hear us?

[Operator]

John Hecht, your line is open. Please proceed.

[John Hecht, Jefferies]

Yes, apologies, guys. I was on mute. Can you hear me now?

[Dan Pietrzak, Chief Investment Officer & Co-President]

Yes.

[Steven Lilly, Chief Financial Officer]

Yes.

[John Hecht, Jefferies]

Thanks very much for allowing me to take my questions. So, first one is that with respect to the first quarter guidance worksheet with respect to kind of more than market commentary, we're talking about kind of the ability to pay a 9% yield is a little bit obviously tied to competitive factors, and to overall liquidity and spreads in the overall market. With respect to competitive factors, yes, I'm wondering if you can discuss any more detail there. How is that influencing your total kind of basis rate in the market now? And then how is that also influencing structures? Because, Dan, you did talk about a lot of the focus has been structural protection in the deals.

[Dan Pietrzak, Chief Investment Officer & Co-President]

Yes. John, thanks for that question. The market for sure is competitive, right. I think in many ways, I think Wall Street is always a competitive place. And I think you'd probably see that a little more in months like January when -- maybe when deal volume is sort of less. That said, if you'd maybe take a broader view of just how the market has evolved over the past years, clearly, it's been an eventful year. I think where we sit today, there is a little bit more discipline as it relates to structure of loans, review of EBITDA adjustments, albeit there's discussions around how do you look at sort of COVID moves.

So I think there's a little bit more discipline in there. I think pricing has come back clearly to pre-COVID levels, maybe even a little bit inside, considering where the overall rate environment has gone. I think, from our perspective, we've built out our origination footprint to, quite frankly, be able to see as many deals as possible, and then try to be as selective as possible to do those deals that we want to do. I think we've felt good about that. But I think we acknowledge it's a competitive market. But like I said, in response to Casey's question, I do think it's going to be a pretty active year in '21, and I think we feel good with how we’re positioned going into that.

[John Hecht, Jefferies]

Okay. And a follow-up question. And I guess that would be the commentary a little would be also, a little bit about the active market you just referenced. But if you look at floors and spreads and you think about calling the cohorts of originations in your portfolio, is there a way to think about how much of the portfolio would be subject to call a prepayment risk over the next couple quarters? And how are you thinking about that concept over the course of the year, given those characteristics?

[Dan Pietrzak, Chief Investment Officer & Co-President]

Yes, it's a good question. I think in many ways, your -- most of what we’re underwriting our loans that we're expecting these companies to grow, and then to either be sold, or potentially refinanced in the syndicated market. That said, I don't think we're -- necessarily off our historical view that this -- a portfolio like this will turn every 3.5 sort of 4 years. I think you that may not be perfectly straight line, it could be weighted more in one quarter than other. But I think if you looked at it over a constant sort of 12 months sort of period, that probably lines up pretty well.

I think from loan structures, just going back to your question, I think LIBOR floors are still very prominent in private credit deals. I think we've seen a little bit of pressure on them to go down for 1%, but we're hoping the market does hold the line there. You still do so to see call pros, you can kind of benefit from that on the other side. But I was thinking about that as that 3.5, sort of 4 year comment, if you think about the numbers of that for our BDC platform, roughly $16 billion of assets, it means you need to sort of originate, roughly $4 billion to $5 billion per annum to kind of "stay flat" and I think we've got the platform to do that.

[John Hecht, Jefferies]

Yes. Thanks very much. Appreciate the comments.

[Dan Pietrzak, Chief Investment Officer & Co-President]

Thank you.

[Operator]

Our next question comes from Paul Johnson with KBW. Your line is open.

[Paul Johnson, Keefe, Bruyette & Woods]

Good morning, guys. Thanks for taking my questions. So I want to know, how should investors sort of think about the write-ups in assets, the appreciation this quarter as well as just kind of the stability around book value just given the current credit issues in the portfolio? I mean, should investors expect any potential more upside appreciation to book value if the economy remains as strong as it is today?

[Dan Pietrzak, Chief Investment Officer & Co-President]

Yes, good question, fair question. Maybe a couple of points there to sort of note. I mean, we did talk about Slide 12 that's in our investor presentation. I think we've been happy with what we've seen in terms of this roughly $4.5 billion of investments that have been made since this partnership and this advisor started. So I think there's a -- hopefully a good story there. And obviously, there's constant work to do as it relates to that. I think you saw or you heard about some of the restructurings that we've done this quarter. We'd like to think that there is some upside nodes there. But I think broad stroke, like we feel pretty good, where the book is positioned, right. I mean, there was a fair amount of legacy names that took some real pain. Q1, Q2, I think COVID exacerbated a lot of that, unfortunately, there was some sort of true realized losses there. But when I think about the totality of the portfolio, looking at that performance on 12 of the investor presentation, looking at just how the book is positioned. Again, I think we feel pretty good as we're sitting here today.

[Paul Johnson, Keefe, Bruyette & Woods]

Okay. Thanks for that. And then, for the borrowers that did require assistance, either by the sponsor or the lenders, probably usually both, could you talk about these companies that did receive assistance, how they've performed, I guess, so far year-to-date and how -- just how you feel about that part of your portfolio? Are you comfortable with the adjustments that you've made to get these borrowers in a position to repay debt? Or do you think at this point, it's still just too early to tell?

[Dan Pietrzak, Chief Investment Officer & Co-President]

No, it's a fair question. I mean, it's probably a little bit subject to the underlying credit themselves. I mean, I can think about one name that we had to do almost a many sort of restructuring in April of 2020, the sponsor ended up putting in new money, but that new money was forced to be parry with our debt, that's not something we're usually comfortable with at all, but we wanted that to get done. That company has actually had some meaningful contract wins that was a name we've actually upgraded in our risk ratings from a 4 sort of up to a 3. So I think you're seeing some positive outcomes there. A handful of the names that are in the direct COVID impacted spaces. Maybe it's a little bit -- still too early to tell. That said, the support they got from the sponsors was strong. I think we had more than a handful of deals where equity was put in by the sponsor, in return for covenant leaf, etcetera -- covenant relief, etcetera. And they take a lot of costs out of these businesses as well. So, I think most of the things that we would have thought about where we were dealing with again, is just more of the events like you're talking about, I think those companies were pretty decently positioned.

[Paul Johnson, Keefe, Bruyette & Woods]

Sure. And as far as -- obviously, the direct lending market has gone through a lot of growth and development since the last cycle. And now that we appear to be coming out of another one, and obviously one as we're talking about today, that required a decent amount of cooperation with sponsors and companies to provide waivers, amendments, etcetera. How do you view, I guess, the borrowers and the private equity sponsors demand for direct lending capital, I guess, kind of moving forward in the cycle. I mean, do you think there's a higher propensity for many of your companies to kind of maintain sort of a preference towards the institutional direct lending markets, just because of all that flexibility that it was provided? Or do you expect kind of the pricing and liquidity of the BSL market to just remain a -- just a major competitor for the institutional markets?

[Steven Lilly, Chief Financial Officer]

I think it's more of the former. I mean, you're right, the markets grown a lot. I think the market -- I like to use this word is almost institutionalized itself, right? These become sort of big lending platforms. I think in some ways that the stress that COVID brought was probably a welcome challenge to see how people funded revolvers and funded delayed draw term loans. There was definitely some challenges in the market with that. But I think about us, I think we were positioned pretty well from a liquidity perspective. So our view is very clearly that this is going to continue to be a space, direct lending private credit that will get more intention. You intended to be a solutions provider, you're intended to work sort of well with people. There's a certainty of close sort of concept to it. So I think overall, I think we'd like the tailwind behind it. But Brian, you should add to that.

[Brian Gerson, Co-President]

Yes. I think the other thing I'd say is to your earlier point on some of the names that had either relief or sponsor equity, I mean, having sort of a single lender point of contact really facilitates those conversations. I think, for sponsors, what matters often is not so much necessarily all the exact terms of your paper, but who holds it. And the fact that you're working with a single source of capital, who can make decisions, you're not dealing with 20 individual holders in a syndicate with different bases and their loans and different agendas, makes workouts and amendments quite -- more -- quite easier to get done, frankly. And I think sponsors are just -- they've seen the product tested, and I think it's -- it was tested well through COVID.

[Paul Johnson, Keefe, Bruyette & Woods]

Okay, thanks for that. Those are very thoughtful answers. And that's all I have today.

[Brian Gerson, Co-President]

Thank you. Have a good day.

[Operator]

[Operator Instructions] Our next question comes from Robert Dodd with Raymond James. Your line is open.

[Robert Dodd, Raymond James]

Hi, guys, and congrats on the quarter. If I can first one probably for you, Dan. I mean, your comments about second lien in response to Casey, obviously deal related etcetera. But you've always said from way back that you don't want to do a second lien behind the covenant with the BSL market being so hot. Are you seeing just -- do you expect to see more opportunities of Cub like first liens that you could get in behind? And should we expect more second lien in the origination pipeline and growth of that in the mix of the portfolio over the course of, say this year?

[Dan Pietrzak, Chief Investment Officer & Co-President]

Yes, fair question. I think simply I don't believe that to be the case, right? I think it's going to be a name by name basis. We are going to get behind industries, larger companies, we're very prepared to do that, if we think we can earn those outsized returns. That said, I think when the market is generally, as punchy as it is on the syndicated side, the returns that are available for us in the second lien bucket just usually aren't there, right? So I think while -- yes, you might see more covenant light activity because of the syndicated market. I think the spread environment would probably balance that a bit. So I wouldn't expect any real change of portfolio construction.

[Robert Dodd, Raymond James]

Got it. I appreciate that. On -- a couple of other quick ones, if I can. [Indiscernible] second quarter in a row, paid a pretty attractive dividend. Obviously, it didn't pay in the first half. I mean, is this -- is the second half dividend from [indiscernible] kind of is an element of that catch up? Or is this the kind of run rate dividend that can be expected from that platform going forward?

[Dan Pietrzak, Chief Investment Officer & Co-President]

Yes, I mean, not catch up. I think much more akin to run rate. Obviously, that'll be a little bit subject to loans that they're originating or repayments they're might seeing, so it could be some variability around it, but more a steady state number. And you're correct, the company didn't pay in Q1 and Q2, which was the prudent thing to do considering the market environment.

[Robert Dodd, Raymond James]

Understood. Thank you. And then if I can one more real quick one on the liability side. Obviously, the unsecured that you did back in the period of COVID, which added a lot of valuable liquidity at a time, pretty expensive. It's redeemable at any time, but it looks like that the retention costs are pretty onerous for the next couple of years. So I mean, any color on long-term planning? Or when you -- would you expect that to go to maturity, or would you expect to get out of it in a couple of years? It looks pretty costly until 2023, though. So, any color there would be appreciated.

[Dan Pietrzak, Chief Investment Officer & Co-President]

No, fair. I mean, it's -- we acknowledge that sticks out versus a $1 billion deal of 3.4% inside the same calendar year. I mean, we -- like with the information that was available to us at the time, with the market environment we saw, we were quite happy to take capital like that. While it is sort of expensive, I think it added 25, 30 basis points to our overall financing costs. That said, you should not expect that to be outstanding to its maturity, especially in the current environment we are in. It's really a non-call too and then sort of prepaid penalty step down from there.

[Robert Dodd, Raymond James]

Yes. Got it. Thank you.

[Operator]

Thank you. And we are currently showing no further questions at this time. I'd like to turn the call back over to Dan Pietrzak for closing remarks.

[Dan Pietrzak, Chief Investment Officer & Co-President]

Thank you all for joining the call today, and thank you for your support. We look forward to talking with you again in the spring. We do hope you and your families remain safe and healthy. Thanks.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.