Blue Owl Capital Corp
NYSE:OBDC
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Blue Owl Capital Corp
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Good morning, and welcome to Owl Rock Capital Corporation's First Quarter 2020 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 forward-looking statements as a result of a number of factors, including those described from time to time in Owl Rock 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 first quarter ended March 31, 2020. This presentation should be reviewed in conjunction with the company's Form 10-Q filed on May 5 with the SEC. The company 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 the company's website.
I will now turn the call over to Craig Packer, Chief Executive Officer of Owl Rock Capital Corporation.
Thank you, operator. Good morning, everyone, and thank you for joining us today for our first quarter earnings call. This is Craig Packer, and I'm CEO of Owl Rock Capital Corporation and a co-Founder of Owl Rock Capital Partners. Joining me today is Alan Kirshenbaum, our CFO and COO; and Dana Sclafani, our Head of Investor Relations. Welcome to everyone who is joining us on the call today. We hope you and your families are safe and well during these unprecedented times.
At Owl Rock, we've been incredibly focused on managing our portfolio, while taking the necessary steps to ensure the safety of our team and maintaining full operational continuity. Our entire team has been working remotely for 2 months, and we are proud and appreciative of their efforts to engage closely with our borrowers, partners and service providers, while always striving to be accessible to all of our stakeholders.
Recognizing this environment is markedly different than anything -- any of us have ever seen. I will start today's call briefly discussing our investing activity and financial highlights for the first quarter, but then spend the bulk of our time on what we are seeing across our portfolio and our response to these challenging conditions. Then after Alan covers our financial results, I will conclude by discussing our outlook and what may come next.
Getting into the first quarter highlights. Net investment income per share was $0.37 for the quarter, the same amount as the fourth quarter. We ended the quarter with net asset value per share of $14.09, down 7.5% versus the prior quarter, primarily reflecting the unrealized losses across the portfolio, resulting from the significant spread widening we saw in the market at the end of the quarter.
Looking forward, for the second quarter, our Board has declared a dividend of $0.31 per share, the same amount we have paid each quarter since our IPO and which is in addition to the previously declared special dividend of $0.08 per share.
Moving on to our investment activity. In the quarter, we completed $731 million of new investment commitments, $616 million of new investment fundings and $198 million of net funded investment activity, which was net of $418 million of
[Audio Gap]
In line with my comments on our fourth quarter call, this quarter, we did see lower-than-average origination levels, which reflected lower levels of private equity deal activity. In addition, we saw an increase in prepayments. We added 7 new portfolio companies this quarter, with investments across 4 first-lien facilities, 3 of which were unitranche facilities; 2 small second-lien term loans for companies in the software space; and 1 modest-sized equity investment. The weighted average spread of the new investments was 610 basis points. We are pleased with the spreads we were able to achieve this quarter.
We also increased our investment in 11 portfolio companies, largely reflecting add-on facilities used to support acquisitions. We had full paydowns on 4 portfolio companies, bringing the total portfolio at the end of the quarter to $8.9 billion across 101 borrowers. While this reflected a lower level of net activity than previous quarters, in light of the change in the market environment, this has proven to be a silver lining, as it leaves us with that much more dry powder to weather the storm that has arrived and to take advantage of future opportunities.
While we are pleased with our investment performance for the quarter, and we would be happy to discuss it further during the Q&A session, in light of the dramatic change in the environment due to the COVID-19 pandemic, we thought it would be most useful to share as much perspective as we could about how this environment impacts our business.
To start, I want to offer some context. We believe we entered this unique period in a position of relative strength. Our portfolio consists primarily of first lien term loans to upper middle market businesses with an average EBITDA of $83 million. We try to assemble our portfolio in a defensive-minded manner by focusing on large, stable, recession-resistant businesses. We are well diversified across 27 industries, with no industry representing more than 9% of the portfolio and our top 10 positions representing 24% of the total. Since inception, our portfolio performance has been very strong. And coming into this crisis, by and large, most of our companies were performing very well at or exceeding our expectations.
We focused our portfolio on financial sponsor-backed companies because we believe that sponsors can provide financial and operational support to their portfolio companies, which can help them weather challenges and preserve their long-term value. On this note, one benefit of having a relatively younger platform is that roughly 2/3 of our sponsor-backed portfolio companies are owned in private equity funds with either permanent capital or relatively recent vintages, generally in funds that have closed in the last 4 years, and that these investments tend to benefit from the dry powder available in these funds, meaning that sponsors have both the motivation and the ability to continue to provide financial support to these portfolio companies.
In addition to a well-performing portfolio, we also entered this period with a strong balance sheet. Alan will touch on this later in the call, but we believe we have one of the strongest balance sheets in the sector, which provides us with superior level of flexibility to navigate the challenges ahead.
With all that said, I'd like to turn now to our response to the unique challenges posed by the COVID-19 pandemic. Given the sudden and dramatic change to the U.S. economic outlook, our focus across all of Owl Rock has been on protecting our portfolio and our balance sheet.
With respect to our portfolio, we have taken a number of steps to enhance information flow and communication and to prepare for the needs of our companies, so that we can protect our investments.
In addition to our normal underwriting and portfolio management process, we have rolled out enhanced portfolio monitoring and management. Since the scope of the crisis became clear, we embarked upon a re-underwriting of each name in our portfolio to assess the potential impact in the stay-at-home environment. We have been closely monitoring portfolio exposures to COVID, with a new portfolio heat map focused on risks in both impacted sectors as well as impacts to individual names. We have spoken with each of our borrowers and their sponsors to understand what is happening on the ground at the portfolio companies and what may come next, and the strategic and operational steps being taken. These conversations are ongoing, happening weekly or even daily as updated information emerges.
As our investment teams undertake this work, they share the latest updates with our leadership team in real time. In addition, we are holding weekly meetings to discuss portfolio company developments in greater detail with the full investment committee. This effort has been led by a portfolio management task force of our most senior underwriters, which was created to provide an enhanced level of support for each investment. This task force is led by our Chief Underwriting Officer and our Head of Portfolio Management.
We also continue to add to our workout capabilities. In April, we brought onboard a new Head of Workout, who previously held this role at another direct lender. With more than 55 experienced investment and portfolio management professionals, many of whom have spent years in the direct lending space and have experience investing through a credit cycle, we believe we have all the necessary resources to manage the portfolio through this difficult period. We have asked several senior members of our team with significant workout experience to dedicate their time to portfolio management, including workouts as they arise, and we plan additional hires in this area.
We have a portfolio of companies, which were quite healthy prior to the crisis. However, the nature of the economic shutdown has created pressure on many companies' needs for near-term liquidity, so we are focused on that for each of our borrowers. Given the uncertain outlook, we are running downside scenarios in which the economic impact is felt for a sustained period of time. I will touch in more detail on our current investment posture later in the call, but our focus right now has shifted to primarily preserving significant capital to support our borrowers, should they need it, so that we can protect the value of our investments.
On that note, I'd like to touch on the revolver activity that we saw this quarter. In the first quarter, we net funded approximately $215 million under our outstanding revolving credit facilities, resulting in approximately 60% of our total revolving credit facility commitments being drawn. Some of this was for normal course operational funding. However, some borrowers chose to draw down on their revolvers to shore up their liquidity. This was an orderly process, and we have seen this activity level off. Alan will spend more time on this shortly, but I would highlight that we have multiples of the necessary liquidity to fund the entire balance of our undrawn commitments, should we need to. Beyond funding revolving credit facilities, we also have ample financial resources to provide financing to our portfolio companies where we feel it's prudent.
Lastly, the financial sponsors we back typically have substantial funds available to support their portfolio companies. We are discussing with many of them what the support might look like, and we expect they stand ready to provide it, should their companies need it.
Now I would like to discuss the current state of our portfolio. First, let me state the obvious. The U.S. economy is going through an unprecedented dislocation, and it is simply not possible to tell how long this will last and what the impact will be, but we can give you a relative sense of what we see as the positives of our portfolio and areas of greater concern. I would point you to Page 12 of our earnings presentation with our sector exposures for more detail.
Since inception, we have focused on building a diversified and defensive investment portfolio. Our 6 largest sectors are software, professional services, insurance, health care providers, distribution and food and beverage, which collectively comprise approximately 46% of our portfolio. Generally speaking, we think this is a solid core group of sectors that should hold up better than most in the current economic environment.
Software has always been one of our largest industries. We believe our software investments will be amongst our strongest investments and the most resilient in the face of the economic environment. These products are used by their customers as part of daily operations, and these companies often have contractual revenue streams and high customer retention, as customers are unlikely to cancel their technology solutions as long as they remain in business. So while we believe these software companies may see a decline in revenue from a decreased customer base, overall, we think revenues of these businesses will be cushioned from declines in the economy.
All of our distribution businesses have been classified as essential businesses and continue to operate, albeit at reduced levels, and our professional services businesses have largely transitioned to a work-from-home environment.
Our insurance businesses, which address health and other risks, are often sold remotely and typically have a predictable recurring annual renewal process.
In our health care businesses, while some names have seen a slowdown due to the temporary restrictions on nonessential medical procedures, the underlying business operations remain fundamentally sound. Further, many expect this will be one of the first areas to reopen, and we expect these businesses will return to more normal operating levels.
Many of our food and beverage businesses are actually benefiting from the increase in at-home food consumption. That's not to say there won't be any idiosyncratic impacts felt in these sectors, but we do think our companies in these sectors should hold up better than others.
Now let's turn to areas of greater focus. In aggregate, we have modest exposure to the sectors that have been most impacted. We have limited exposure to oil and gas as a sector, which represents only 2% of our portfolio. And within that sector, we focus on companies providing midstream services, with less impact from falling commodity prices. That said, I certainly want to be candid with you. We do have companies that are experiencing a direct impact from the economic shutdown. While we do not have direct exposure to the travel and hospitality sectors, we do have several names, which serve the travel or hospitality end markets.
In addition, some of our companies have ultimate end markets in the leisure and personal care space, which we are seeing -- which are seeing a direct impact from store closures.
We have a couple of investments in the aerospace sector, which are materially impacted by the drop in aircraft production and commercial airline travel.
We have several smaller investments in quick-service restaurants, which may still have doors open, but are seeing a significant drop in same-store sales.
In addition to these focused sectors, we certainly expect a significant drop-off in economic activity to broadly impact our portfolio. You can see these developments reflected in our internal credit ratings for the quarter. We downgraded investments representing 4.8% of the portfolio to a 4-rating on our internal rating scale. This is the first time since our inception that we have investments in this rating category, which we define as a loan where the risk has increased materially since origination. The portion of the portfolio that is 3-rated increased to 6.8% from 5.3% last quarter, bringing the total of 3 and 4-rated investments to approximately 12%.
We ended the quarter with no names on nonaccrual status, consistent with our results since inception. Through the end of March, each of our 101 portfolio of companies were current on their contractually obligated interest payments. For 2 of our borrowers, we and the other lenders in those deals agreed that the interest payment could be made as PIK in order to enhance the company's liquidity.
In addition, after quarter end, we have one company, National Dentex, that remains in an uncured covenant default. This company remains current on its interest, and we are in discussions with the company and sponsor on next steps.
Later in the call, I will make some further comments on how we are approaching the portfolio, but I would remind you, the average loan-to-value of our investments is approximately 50%. This means, on average, our companies could lose 50% of their value, and we would still not be impaired. While we don't want to minimize the magnitude of the challenges ahead, as they are significant, we entered this period with a healthy portfolio of businesses, which we believe will come through the crisis, retaining meaningful value. We are focused on working with the sponsors and ensuring our borrowers have the financial wherewithal to make it through these challenges, so that we, as best we can, realize the full value of our investments in each case.
Before I turn it over to Alan, I want to touch on 2 events that occurred following quarter end. The first was the expiration of the second tranche of our share lockup. As a reminder, 100% of our pre-IPO shareholders were subject to a lockup on approximately 375 million shares outstanding at the time of our IPO in July 2019. On April 14, the second tranche of 125 million shares became freely tradable, increasing our public float to 270 million shares. The final 125 million locked-up shares will become freely tradable on July 20.
We also announced on April 1 that our Board of Directors unanimously approved a reduction of the company's minimum asset coverage ratio from 200% to 150%. Once effective, we plan to target a debt-to-equity range of 0.9x to 1.25x, which would allow us to operate with an increased cushion to the regulatory threshold. I want to underscore that this decision was not driven by any recent changes in the market or economic environment, but rather is a part of the natural evolution of ORCC's balance sheet over the past few years. This was primarily driven by our desire to have an increased regulatory cushion from our target leverage level, not to operate with significantly higher leverage over time. From the inception of ORCC, we have worked hard to build a strong reputation and track record with our stakeholders, including equity investors, lenders, bondholders and rating agencies, and feel this was the right time to take this step.
To that end, we are pleased that each of the rating agencies affirmed our investment-grade rating and outlook following this announcement. The reduced asset coverage will enhance our ability to deliver attractive returns to shareholders, while continuing to prudently manage risk and maintain a strong balance sheet.
Now I'll turn it over to Alan to discuss our financial results in more detail.
Thank you, Craig. Good morning, everyone. First and foremost, we hope that you and your families are all safe and healthy. These are certainly unprecedented circumstances, and we want to thank you for your continued partnership and support. There's a lot to cover today, so I'm going to hit the numbers for the quarter now, and then we'll get into a series of other important topics.
To start off, and you can follow along on Slide 7 of our earnings presentation, we ended the first quarter with total portfolio investments of $8.9 billion, outstanding debt of $3.6 billion and total net assets of $5.5 billion. Our net asset value per share was $14.09 as of March 31 compared to $15.24 as of December 31, a NAV decline of approximately 7.5% quarter-over-quarter. Our dividend for the first quarter was $0.31 per share, plus an $0.08 per share special dividend, and our net investment income was $0.37 per share.
On the next slide, Slide 8, you can see total investment income for the first quarter was roughly flat at a little over $200 million or $0.52 per share. Although our total funded par, the principal amount of loans, which is what interest income is calculated off, went up approximately $500 million quarter-over-quarter, this was largely offset by the decline in LIBOR. Expenses were also flat quarter-over-quarter, leading to NII flat at $56 million or $0.37 per share. Our cost of debt continues to come down driven largely by the decline in LIBOR. Our other expense ratio continues to be among the lowest in the industry at 25 basis points on a trailing 12-month basis, and we have $0.14 per share in undistributed distributions as of March 31.
There are a number of key topics I wanted to cover today. First, when I pull the lens back, the first thing I think about is our financial philosophy. Having been a CFO in the BDC space for a long time now, I've seen a lot of financing structures and different ways folks have chosen to build their financing landscape. At the end of it all, coming into this crisis, or probably any crisis, I think of there being 3 pillars that are very important that are really key that can put you in a significant position of strength. The 3 pillars are: one, a low level of leverage; two, a lot of liquidity; and three, having issued unsecured debt, which prevents you from being overly reliant on secured debt. So for ORCC, we have one of the lowest leverage levels in the industry at 0.6x debt to equity. We have $2 billion of liquidity, and we have issued $1.5 billion of unsecured debt.
So to sum this all up, we entered this crisis from a significant position of strength, and we are in the process of adding to that position of strength by creating more cushion to our regulatory cap with a decrease in our asset coverage requirement to 150%. Our shareholders are set to vote on this at our annual meeting on June 8.
We also have been in discussions with the lenders for our senior secured revolver to amend the covenants in our credit agreement, allowing for the 150% asset coverage level. I am pleased to announce today that we now have the approval we need to complete this, and we'll close this amendment this week.
Another key topic is our liquidity position. As I just noted, we ended the quarter with $2 billion of liquidity in cash and undrawn debt capacity. We have $600 million in undrawn commitments to our borrowers, $2 -- $200 million in the form of undrawn revolvers and $400 million in delayed draw term loans, most of which is tied to acquisition financing.
So to describe this another way, we could fund these undrawn commitments to our borrowers almost 3.5x over. Another way to think about our liquidity position is to say we have enough liquidity based on today's NAV. We've got a 1x debt to equity without raising another dollar of debt. And from a leverage perspective, we have a very large comfortable cushion to our regulatory cap. That's a very good position to be in right now.
Now to cover our funding profile. We are very well capitalized with attractive financing structures, which are well matched to our assets from a duration perspective and diversified across financing facilities and lenders. Our weighted average debt maturity is over 5.5 years, and we do not have any debt maturities until December 2022. We have 4 investment-grade ratings. This has helped us issue $1.5 billion of unsecured bond. This means that 40% of our funded debt capital is in unsecured debt, which provides us with significant unencumbered assets and meaningful over-collateralization of our secured credit facilities, and we have limited exposure to mark-to-market across our secured credit facilities. As an example of how over-collateralized our balance sheet is, if we were to draw down all of the remaining capacity under our senior secured revolver, which we have the full ability to do at any time, we would have approximately $6.4 billion of fair value of investments, supporting -- collateralizing outstanding debt of $1.2 billion on our revolver. That's over 5x collateral coverage. That's also a very good position to be in right now.
Also key here are asset liability rate sensitivity. As LIBOR has continued to decline due to recent actions by the Federal Reserve, we are focused on how lower rates will impact our operating results. The weighted average yield on our debt investments at fair value in the quarter decreased from 8.7% to 8.4% driven largely by the decline in LIBOR. However, our debt investments are subject to LIBOR floors, and the weighted average LIBOR floor is 86 basis points, which should minimize the impact to NII of further material declines in LIBOR. Similar to last quarter, the impact of the current decline in LIBOR was partially mitigated due to the floating rate nature of our liabilities, with our weighted average cost of debt declining 40 basis points to 4.2%. Today, approximately 80% of our debt is floating rate, which means we are well matched and generally allows our overall borrowing costs to move roughly in line with broader movements in rates. To the extent LIBOR decline below our debt investment floors, we should experience modest NIM expansion.
And finally, my last key topic, our valuation process. As a refresher, we implemented from day 1 a best-in-class valuation process here at Owl Rock across our entire platform. An independent valuation firm spends a lot of time with us throughout each quarter and, at the end of every quarter, independently marking every position. They provide a point estimate for each investment, not a range, and that point estimate is provided to our Board of Directors for Board approval. As part of this process, there are 2 major drivers of fair value: one, change in spreads, what we call market adjustments, which is the impact of credit spreads widening or tightening and can make fair values go up or down; and two, credit adjustments, which can also make fair values go up or down. For the first quarter, our total unrealized loss was $1.17 per share. Approximately 75% of this amount was due to credit spread widening.
Okay. Some other notes before I wrap up. As a reminder, we've put in place a number of shareholder-friendly structural features in connection with our IPO that included a fee waiver and a series of special dividends. During the quarter, we waived $42.5 million of fees. In total, so far since going public, we have waived over $115 million of fees. We continue to pass this fee waiver on to our shareholders in the form of special dividend that our Board has previously declared $0.08 per share per quarter throughout 2020. Under the terms of our programmatic buyback program through April 30, we purchased 10.3 million shares, which equated to approximately $122 million. Given the programmatic nature of the plan, the repurchase amount is governed by a preset buying formula and is a function of liquidity in our stock. As a reminder, the plan is nondiscretionary, active on any day the stock trades below our most recent NAV per share and operates within the parameters of rule 10b-18, which sets a maximum daily volume restriction for buying back stock at 25%.
Okay. So now to wrap up, a few quick closing comments. First, we entered this crisis from a significant position of strength and continue to be in a very strong position structurally. We are at a very low level of leverage. We have a substantial amount of liquidity. And due to the unsecured bonds we issued, our secured lenders are very significantly over-collateralized. Next, we have 4 investment-grade ratings. None of the agencies have changed our rating or outlook since the crisis has started or following our announcement for adopting the lower asset coverage requirement of 150%. And finally, given everything I just discussed, we wanted to point out that we are not making any changes to our dividend policy, nor are we making any changes to our previously declared special dividends.
Thank you all very much for your support and for joining us on today's call. Craig, back to you.
Thanks, Alan. I want to spend the last few minutes discussing our current activity and outlook.
Not surprisingly, new deal activity has slowed. Private equity firms are focused on their existing portfolio of companies. And in this environment, it will be difficult for buyers and sellers of assets to agree on prices. In addition, most companies have paused their acquisition plans. Given our strong balance sheet and sponsor relationships, we are seeing some very interesting opportunities to provide financing to companies seeking enhanced liquidity. However, given the economic uncertainty, our bar to invest in new situations is extremely high. And until the environment stabilizes, we don't expect to invest significant capital in new portfolio companies. While we have highlighted our liquidity and available capital, we are focused on preserving that capital primarily for our existing portfolio companies, so we can protect the value of our existing investments.
Clearly, we are preparing for the results of our portfolio companies to be significantly impacted in the second quarter, as this will reflect the full impact of the economic slowdown. We are focused on each company's liquidity profile and are in close dialogue with them on the steps they are taking to reduce costs and manage near-term cash flows.
In the second quarter, we expect to see an increase in discussions with our borrowers and their sponsors around the need for covenant amendments and request for additional support. We are entering this period with the financial and portfolio management resources to be a resilient source of support, but with the clear objective of protecting each of our investments with the goal of getting back par on our original investment. While we always expect some level of loss on our portfolio, we remain focused on this goal of getting back par, even sitting here today. We have been encouraged by the tone of the conversations with many of the private equity firms, and expect a number of them to continue to invest equity in their companies. While not our preference and a last resort, should there be hopefully a limited number of situations where we need to achieve that goal by taking over ownership of one of our companies, we are resourced and prepared for that. Given the strength of our platform and the depth and experience of our team, we feel this will be an area where we can differentiate ourselves and optimize outcomes for our shareholders.
We believe many of our borrowers, while struggling today, are fundamentally attractive businesses that will recover in line with the eventual broader economic reopening. I'd note that the vast majority of the unrealized losses and NAV decline we reported this quarter reflect the impact of the spread widening in the markets. Since quarter end, we have seen market spreads tighten, which, if sustained, will increase the value of our portfolio. However, what ultimately matters most is getting repaid on our loans at par. For now, we are focused on working with our borrowers to get through this near-term period in order to preserve the long-term value of the company and continue to protect the downside case for our investments.
These events have highlighted the size and resources of our platform and our balance sheet. We believe we will be one of the lenders that private equity firms will increasingly turn to given our ability to provide sizable, customized direct lending solutions, our large, high-quality team and our differentiated relationships. We also believe that the value proposition of direct lending is that much more attractive, as the syndicated loan and high-yield markets have seized up, and banks are unwilling to make new commitments.
As the economy eventually recovers from this crisis, we believe we are well positioned to take market share and to emerge in an improved market position. As we gain better confidence around the needs of our portfolio companies, we believe we will eventually be able to shift our focus more towards new investment opportunities. Given the market disruption, we believe these new opportunities will offer very attractive economics, covenant packages and structural protections.
As we think about capital deployment in the context of returning to our target leverage level, we still expect that we will be at or around 0.75x around the middle of the year. It's important to note that we are not in a rush to increase leverage. Instead, we are focused on deploying capital defensively in situations in which we have high conviction. Longer term, we feel there are several areas that will allow us to increase returns on our capital. We expect to maintain our focus on primarily first lien investments, including unitranches. We expect new loans will have improved economic terms, including spreads, OID and call protection. Given our platform attributes, we hope to increase market share for the most attractive credits.
While we are in no rush to increase our leverage, should our shareholders approve our request to increase our regulatory cap to 2 to 1x, we will eventually be able to modestly increase our leverage to a target of 0.9 to 1.25x, resulting in improved returns. As conditions improve and existing loans are repaid, we will be able to reinvest proceeds at more attractive spreads. I would note that we have a significant amount of high-quality, but lower spread, first lien term loans in our portfolio that are currently at a spread of L plus 500 or less, which, as repaid, would provide an opportunity for increased spread.
In closing, I want to reiterate a few points. The economic outlook is extremely uncertain, and there is much hard work ahead for us. We believe our portfolio and our balance sheet are as well positioned for the current challenges as we can be. We have the resources and expertise to manage through these difficult times, and we are highly focused on managing each loan to minimize the risk of default and, should that to occur, to maximize our recovery. We take our responsibility to our shareholders, our companies and our lenders incredibly seriously, and we are focused on taking the necessary steps each day to live up to the trust you have placed in us. We look forward to keeping you apprised of our progress.
Thank you for joining us today. And on behalf of the entire Owl Rock team, we hope each of you and your families remain safe and well.
Operator, please open the line for questions.
[Operator Instructions] Our first question comes from Casey Alexander from Compass Point.
I have a couple of questions, and then I'll jump back in the queue and circle around at the end, if necessary. First of all, I think shareholders really appreciate the aggressive nature with which the share repurchase program operated. I mean we knew that it had been announced at the IPO, but nobody was really certain until it came into practice how aggressively it might operate, depending upon the environment. With only $27 million or $28 million left on it, it's likely to be used up fairly soon. What's the appetite to reload at the management and Board level?
Sure, Casey. Thank you. We got a lot of questions on the share buyback during this period of time. It shouldn't have been that uncertain because as we have said at the time of the IPO, this was a programmatic buyback that was taking place as long as the stock traded $0.01 below NAV. We didn't disclose the amounts, but it was very clear from our disclosure that any day that the shares were trading $0.01 below NAV that the buyback was -- would be in place. So there was nothing aggressive or not aggressive about it. It was just mathematical based on shares that were trading on days that the stock was trading $0.01 below NAV. As you know, most of this period of time since our IPO, that's not been the case. But with the recent market disruption, it's currently been the case. And so the buyback has been operational. We haven't disclosed the formula, but I can share that the program -- the regulatory program that it operates under has a cap on any given day of 25%, so that can't be above that. We haven't disclosed the exact percentage, but you can do some math around the 25% and can't be above that. So that's a little bit of the context around it.
In terms of going forward, as I've indicated in our call, our focus right now is on being defensive with the portfolio and preserving our liquidity for protecting our existing investments. We think the most important thing we can do for our shareholders is getting back par on all of our investments. And our dry powder and the capital we have for that is critical to that because we may need to provide liquidity for these companies to ultimately improve our prospects of getting back par. So that's really our goal. Over time, to the extent that the programmatic buyback runs out, we would certainly engage in a discussion with the Board and -- about whether we should do a different type of program. The programmatic program was really put in place on the context of the IPO and trying to make sure the IPO was successful. We may consider that or others, but I would say it's not a big focus for us right now. And I would not want to set expectations that you should expect to see an additional buyback program put in place in the near term. So that's as best I can give you color on it right now.
Okay. That's very fair. And secondly, as I kind of work through the math, where rates have gone, which has sort of been unanticipatable, and the likelihood that, at least for a while here, we're in an environment where there's not a lot of deal activity, and making deployments at the rate that you had in the past might be somewhat difficult. You've kind of run through the math and it could be that when the management and fee waivers run out, having net investment income that exceeds the base dividend could be challenged by $0.01 or $0.02 or $0.03. Would the company consider partial incentive fee waivers to make sure that NII covers the base dividend if that event were to eventualize?
Sure. So I'm going to come back to the guts of your question in a second, but I think we can all agree that the most important thing we can do for our shareholders right now is making sure that we get back par on our loans. Our -- we obviously have experienced a reduction in NAV, which was primarily driven by spreads widening. Spreads have now tightened since the end of the quarter. If that sustains, we hope that NAV will go up. The market is obviously baking in an expectation of loss. Our goal is to avoid those losses and experience and get our stock back to NAV. And in the short term, our focus is on that. But you're right. Longer term, assuming we do a great job on that, assuming rates stay low, looking out past some pretty unclear and uncertain terrain, you make a fair point given where LIBOR is on sustainability of dividend.
We think we have a number of levers to address our ability to cover our dividend. We -- first and foremost, we think we're going to have the opportunity to improve spread in our portfolio. I would say that comes from 2 factors. One, as I highlighted in my prepared remarks, we have a significant amount of loans on our books that are sub L plus 500. That was very deliberate on our part, as we assembled the portfolio to do that in a very conservative manner as those companies get -- repay our loans, which will happen over time. We can redeploy that capital at market spreads, that will be in excess of that sub L plus 500.
In addition, in this environment, we think we're going to have opportunities, once we have more confidence in deploying capital, to get meaningfully increased spreads, OID and covenant packages on new loans. As I try to make the distinction in my remarks, I think new deal activity, new buyouts by sponsors will remain modest. But we are getting calls all the time right now from sponsors asking us to finance their existing portfolio company who have liquidity needs, and they like companies who would like to be able to boost their liquidity. And frankly, many of their incumbent lenders are not in a position to provide that liquidity. We are. We can provide that liquidity. And frankly, the terms that are out there that we can get are very attractive. We're just choosing not to do so because we want to save our powder at this moment in time. But over -- at some point, when we get more visibility, we will be able to take advantage of those opportunities. And that's another way that we can improve our returns and improve our ability to cover our dividend.
Last 2 pieces I would highlight. Modest increase in leverage, we're obviously well below, even our previously targeted leverage. And should we get approval to go to the 2x, then we'll have the ability to increase our leverage, over time, a bit higher. That will also increase our dividend coverage and prepayment fees. We've had really modest prepayment fees in the context of a portfolio of our size given the relative use of our platform. At some point, that's going to pick up and that will generate net income for us that will help.
So we think we have a number of levers. In the short term, it's about defense. But over time, we can pull those levers and comfortably cover our dividend.
Our next question comes from Ryan Lynch from KBW.
Just wanted to get some commentary on -- you spoke about your guys' focus right now is to focus on your existing portfolio companies, but you guys do plan on selectively making new opportunities in the market. And you talked about your leverage going up modestly kind of by mid this year. Just wondering, you also said in your prepared remarks that it's really not possible to tell how long this unprecedented economic downturn will last. So when you guys are evaluating new opportunities, what are the criteria that you guys are using and the companies that you guys are focusing on to actually deploy new capital and in an economic environment that just has such great uncertainty?
Sure, Ryan. So as I said, our bar is very high and that's driven by -- we just don't know how long this is going to last and we don't know what the needs are going to be for existing portfolio companies. And we think that it's prudent to really use our dry powder to the extent that those companies are going to need it because they want to try to make sure we get back par. We will do new deals. They'll be pretty limited. The bar will be very high. What's the criteria? Look, I think, first and foremost, it's about credit selection. And I think that in this environment, that's very difficult given the lack of visibility on when the medical environment will improve, when the economy will start to improve. There are sectors where you can gain confidence to underwrite, despite the current environment. We've highlighted some of the sectors that we're large in are the kinds of sectors that we could consider underwriting. Software happens to be one. We think software will hold up well in this environment. Insurance is another. Food and beverage is another. The sectors that we're large in generally are sectors that have reasonable visibility, even in this environment. So if we see opportunities in those spaces, where we feel confident in the ability to underwrite the loan, and we have economics and the feature -- economic features and the equity cushions that we like, we can consider doing that. And we will do it, but I think it will be a pretty limited number, until we get greater confidence on the broader needs for the portfolio. We just need to weigh every new deal opportunity against what the -- what that liquidity may be used for down the line in some of our existing companies. So you should expect to see us do a limited number. We can do a couple of add-ons to our existing businesses, but I think it's going to be modest until we gain more conviction.
Okay. And when I look at your unfunded commitment, speaking of existing companies, when your -- your unfunded commitments have a pretty good mix of secured revolving as well as delayed draw term loans. Can you talk about, are there any specific provisions in there regarding the delayed draw term loans that only make them accessible for certain reasons, like an acquisition or M&A? Or are those free to be accessed by the -- your portfolio companies at will?
Yes. Yes, they do. Typically, the delayed draw term loans have -- are tied to typically use of proceeds related to an acquisition. In addition, they may have other financial tests, such as a leverage test or other credit metrics that need to be met for them to be drawn. So that's typically the case. That's not the case in every situation. But if those conditions are met, then we'll fund the delayed draw. I would say in this environment, the sponsors, I think, are being very cautious about doing additional acquisitions at their portfolio companies for obvious reasons. And so I think they'll have the same caution that we will about whether they will be trying to grow through acquisition right now given their own concerns about visibility in the companies. But there may be some, and we stand ready to meet our obligations under those. It's not a massive number in the context of our overall portfolio. But as needed, we'll provide them.
They also are time-based, unlike the revolvers. The revolvers are typically 5, 6 years. The delayed draws are -- have a time-based limit, typically a year or less, sometimes as long as 2 years. So over time, over the next year or 2, they will all roll off if they're not used. They just go away, unlike the revolvers, where they can be drawn and repaid over time. The delayed draws just go away.
And Ryan, I guess what I would add to that is about 2/3, as I mentioned, of our undrawn are in delayed draw term loans. And we do disclose all of our unfunded commitments. We don't just disclose the ones that we're required to fund immediately, so you see the full population there.
Okay. Got it. And you mentioned that 2 companies this quarter, you guys switched their interest payments to PIK. What were those 2 companies? I haven't had a chance to define them in your scheduled investments, number one. And then what was the thought with switching those to PIK, obviously, that -- you do that in order to preserve cash and liquidity and give that company a better runway to navigate this unprecedented environment. But what was the thought process behind also keeping those on accrual status? That, obviously, if you're going to record that as income, that kind of speaks to you guys' thoughts behind your ability to eventually collect that. And just given the economic environment we're in, it seems so uncertain. Can you just talk about why you felt to switch those to PIK, but also keep them on accrual?
Sure. It's a good and fair question. So if you look through, you'll see there were 2. One was a very small amount for a company that shows up on our SOI as CMS -- excuse me, CM7 Restaurant. We -- it does business under Mitra. It's a restaurant. It's a KFC franchisee. It's less than a $40 million investment, so it's very small.
And so the other one is a company called STS, which we approved post quarter end. So I'm not positive that shows up in the schedule of investments, but that's the other one I'm referring to. STS is in the aerospace space, and that's a bigger investment. It's closer to $200 million.
We got through all our names and determined nonaccrual or not based on our expectation of collecting interest, our expectation of collecting principal. You're right to ask the question. We obviously went through that analysis on these couple of names as well as all our names, but certainly the ones that have lower valuations. And we determined -- and in consultation with our auditors, determined that we expect to get our interest payment and interest over time, and we expect to get our principal back at par. So we, in the short term, thought it was prudent to allow the company have the additional liquidity, but we believe that we would -- we expect to get back par on our investments and, therefore -- and get back our interest. And therefore, it's appropriate to keep them current. Obviously, liquidity in the short term is measured in millions of dollars, and recovery is measured by enterprise value and certainly can lead to situations where companies have limited short-term liquidity, but have lots of enterprise value. And therefore, we thought it was appropriate to keep them current.
Our next question comes from Mickey Schleien from Ladenberg.
Just a couple of questions. I've seen some reports that Owl Rock Partners, in other words the platform, is looking to raise a $1.5 billion opportunistic debt fund to invest in small- and medium-sized companies looking to help bridge their liquidity gaps. It sounds like from your previous comments that the BDC won't co-invest with such a fund. But I'm interested in understanding what sort of structures those investments could take in today's market. And could that turn into deal flow for the BDC down the road when things normalize?
Sure. So look, we're really here focused on ORCC. As you know, we manage 4 funds, not just ORCC, and so it's really not the place to talk about other funds that we may manage. We have -- since inception, have opportunities where multiple funds can invest in the same deal, if the deal is appropriate for those funds. It has to meet the investment criteria for the specific portfolio. That's something we've done since inception. I think it's an advantage for us and our platform to be able to offer that out. But we're very careful about making sure each investment is appropriate for that specific fund. So we -- to the extent we had other funds and they had deal flow that was appropriate for ORCC, just as we've had in the past, we would operate as we have in the past. But the strategy for ORCC remains the same, high-quality, upper middle market, sponsor backed, well-performing businesses. And regardless of any other strategies that Owl Rock pursues in other funds, that strategy is not going to change.
Okay. Understand. And one housekeeping question. I apologize. You may have already mentioned it in the prepared remarks, but what was the portfolio's average LIBOR floor?
So we -- yes.
I'm sorry?
Mickey, it's Alan. On the left side of the balance sheet, it's an 86 basis point average weighted LIBOR floor.
And our next question comes from Robert Dodd from Raymond James
A couple, if I can. I mean, obviously, Craig, your comments about a higher bar to do incremental to take on new investments at this point in the cycle makes a lot of sense. How does that match with the fact that as a platform -- I mean everything happened so fast. The platform had made certain commitments and, obviously, ORCC implicit within that, certain commitments on transactions before these latest events. So are those being reevaluated in the context of the market spreads that have obviously widened for new investments today? Or how does that fit with your -- you obviously have certainty of close commitments already made versus the color you just gave in terms of being very, very hesitant about making new investments right now.
We -- look, it's just not a big -- I think it's not a big factor for us to have spent a lot of time on. I mean, obviously, if we make a contractual commitment to any borrower, we're going to live by that commitment, regardless of a change in economic environment. Our commitments don't allow for us to change our mind based on the economic environment.
Having said that, it's a -- I don't want to -- it's a really low amount of number of deals and dollars and just not consequential to really engage in a discussion. We're not sitting -- our first quarter was a relatively modest amount of deal flow given the slowdown in sponsor activity. That activity only slowed down during the quarter and has only slowed further in the -- in the beginning of the second quarter. So it's -- there's not a large pipeline of deals that we've committed to that we haven't yet closed on. And so it's -- I wouldn't have any great concern over that.
Got it, got it. And then on your -- Alan, coming back to you. The conversations you're having with companies, sponsors ongoing weekly, daily, can you give us any color how much of the feedback you're getting from them is, say, qualitative versus quantitative? I mean I can get the feel where our company can say things are okay, but are you actually receiving, in recent periods, customer renewal rates, cash flow numbers that are very, very up to date? Or is it more of a quantitative -- sorry, qualitative discussion that the -- that's been the focus and the feedback that you've been getting recently?
Sure. Look, this is, I think, one of the big advantages of direct lending versus the public markets. I mean we get a much heightened level of information versus what's available in the public markets. Our teams get to know the companies extremely well. And beyond any required financial information, I would say, most of our borrowers, most of our sponsors want to make sure that the lenders are well informed and provide us lots of information, quantitative and qualitative. I mean it varies by company. But in specialty at times in distress, I think that the companies want to make sure that lenders are well informed. We have covenants in our documents. The vast majority of our first lien term loans have covenants. And so the companies recognize that in this environment, they may be bumping into those covenants at some point in the future. And I think they recognize that they owe it to their lenders to make sure we're well informed and what the prospects are for bumping on those covenants and share that level of information. So we -- our teams are doing a great job of getting that information. Obviously, you want to make sure you don't lose the forest for the trees. And getting daily financial information isn't going to necessarily improve your decision-making. But I'd say we get a good quantitative sense of what's happening on the ground, what the outlook will be. And we feel very well informed, not every single company, but I would say the picture is we feel very well informed on what's going on with our businesses.
And our next question comes from Kenneth Lee from RBC Capital Markets.
Just wondering if you could frame the potential expansion for net interest margins just given where LIBOR currently is sitting at.
Are you -- Ken, are you asking about like spread? Or are you asking about pennies per share?
Ideally, pennies per share or even spread would be fine.
I mean, look, directionally, we think that -- and again, this is really directional and there's not a precise analysis around this. But we think that just by our improved spreads in the current market environment, by replacing lower-spread loans as they roll off with higher-spread loans, we can easily add a couple of pennies a share to our net income per share per quarter.
Ken, you can as always look in...
It's -- go ahead, Alan.
Yes. Sorry. The only thing I would add to that is if you're looking to crunch numbers, Ken, the interest sensitivity table in the back of our Q, in the back of the MD&A might be something you're looking for. But I'm happy to take that up more offline.
Great. And just one follow-up, if I may, just in terms of -- I know there's been ongoing efforts of diversifying the funding mix. And just wondering if you could comment on whether we could see a potential change in either the pace of the efforts given the current environment or whether there's any potential change in plans over there.
Generally speaking, no, no change in plans. It's obviously a more challenging environment to go out and raise debt, but we continue dialogues with our lenders. Our mix is not going to change. If anything, you certainly can continue to see a lot more unsecured in the future, as we've telegraphed on prior calls. But no, nothing generally has changed there.
Our next question comes from George Bahamondes from Deutsche Bank.
I'm wondering if you can give us a sense for the number of borrowers who have reached out for relief or just to engage in conversations around loan modifications in the first quarter.
To give you a sense, I would say -- look, I can give you some metrics. We had less than 10 amendments for the quarter, and less than half of those were for material amendments. There were a number of borrowers that, I'd say, engaged in discussions that didn't result in any substantial amendments. But that number -- I haven't sat back and counted up with the teams. We're always having kind of informal conversations. But in terms of, like, substantive amendments, less than 10, and less than half of those were meaningful amendments. The others were more technical in nature. There's probably another 10 to 20 on top of that, that had informal discussions that didn't result in anything. Obviously, that number's going to pick up materially in the second quarter. But in terms of what happened in the first quarter, it's fairly modest in the context of 100-name portfolio.
And you just, I guess, started to address my next question is it's how you've seen that number maybe evolve through April and the beginning of May. Have you seen a noticeable difference? I'd imagine it would pick up, so wondering if you can share any color there as well.
I don't think I could really define a difference between what happened in the last couple of weeks in March versus the pace in the most recent couple of weeks. I'd say there's a steady stream of conversations. Obviously, our companies generally report compliance with covenants on a quarterly basis. And so at the end of -- as companies look out to where they expect the quarter to come in, that's when those conversations ramp up to the extent they think there's going to be an issue. So I would expect it to be -- look, I think this isn't specific to ORCC. Any direct lender is going to spend a lot of time in the second quarter talking to their borrowers about how they're doing in compliance with covenants. I've tried to be very forthright about addressing areas of concern. I just want to make sure I'm giving you the proper picture. We have a lot of companies that are actually doing just fine in this environment and that aren't engaging us with covenant requests and think they have plenty of liquidity. And we're staying on top of them, but I would say, there are many companies that we don't expect to have any amendments at all.
It's hard to predict because the environment is just unpredictable, and we are prepared for whatever comes our way. But I think that our greatest intensity is going to be focused on those 3 and 4-rated names, those sectors that I've highlighted that are going to be of greater concern. And it's a relatively limited number in our portfolio, 12% at this point. But if conditions continue to be weak, it's -- there's a chance that number increases from there.
So just having an amendment is not a daunting proposition. That's why we have maintenance covenants, just to have that seat at the table and to work through it with the companies. And I don't think the number of amendments, in and of itself, is going to be necessarily an indicator of risk of loss for us. And that's why we have covenant packages. But it is going to be an indicator that you have a seat at the table, and we're focused on preserving the value of our loans.
Our next question comes from Finian O'Shea from Wells Fargo Securities.
First, I want to follow on, I think, what Robert touched on earlier on commitments. Looking at a loan, Forescout, it lists you as leading the $440 million loan, subject to close upon the completion of the debt marketing period. Can you provide context on what that means for your commitment to the deal? Was there any flex language in this one-off? Or did you not commit to the whole tranche, perhaps? Any context would be helpful.
Thanks, Fin. Forescout is a public company. I'm not in a position to make any comment whatsoever on Forescout.
Okay. Understand. And I guess a little higher level then. You talked a bit about rotating out of lower spread loans. L plus 500, I think, was the number you threw out. Looking at one of your larger investments this quarter, KS Management was L 425. So in that context, how much incremental spread do you anticipate being able to take on? And what should we think about the risk and return for that specific credit?
Yes. It's a fair question in the context of the comments I made. The -- that particular transaction was a deal that we had committed to a fair bit ago, I don't remember, but it was months ago. And so you're right that my comments about increasing spread are not consistent with closing on that deal, but that deal was committed to last year. I don't remember on the top of my head when, but months ago. So in -- sitting here right now, I don't think you'll expect to see us do new KS Management-type deals at that spread. At the time we committed, we thought it was a very attractive deal, a very high-quality health care provider. And so we did it then. But I think given how the portfolio has evolved, I wouldn't expect we would do other deals in that spread range in this environment.
So where would we -- I guess maybe that begs the question, where would we deploy capital. I think that we -- unitranche pricing today is substantially -- is higher than L plus 600, let's call it, L plus 650 to 750, that type of spread range. So that gives you a sense of, at least, where that piece of the marketplace is. So I don't -- we won't do too much -- you shouldn't expect to see us do anything meaningful sub L plus 500.
And our last question for today comes from Chris York from JMP Securities.
Obviously, a lot to discuss, so I do just have one question. Craig, in this environment, healthy relationships are key to achieving good outcomes for partners, but they can also be tested from competing interests during stress. So the question for you is, how are you thinking about the need to protect your par value by enforcing your rights as a lead lender today when performance deteriorates versus the risk of impairing the trajectory of Owl Rock's franchise value or market share you've created over the last 5 years?
Sure, Chris. So again, fair question. We -- our role and our job is to protect the value of our investments and our shareholders' capital, period, full stop. Now we -- I appreciate this -- why you're asking the question because we've built our business around being a partner for private equity firms. We very deliberately built that business by having a large pool of capital, a very large team and a broad set of relationships. And you can go through our portfolios and you can see we finance lots of different sponsors. We're not dependent on any 1, 2 or 3. And we cover hundreds of private equity firms. And I think we've done a nice job, and I know the private equity firms would agree of becoming a value partner to the private equity firms. We're going to approach our -- this period of time as constructive as we can be. We're certainly -- we think constructive means listening to the sponsors, being rational about what we're being asked to do. But make no mistake, our job is to protect our loans. And I think that the private equity firms are fiduciaries of capital. We're a fiduciary of capital. Any sophisticated private equity firm that raises institutional capital understands the difference of where we sit in the capital structure and what that means for us. And I believe, and I'm very close -- my partners and I are close to folks running private equity firms. They understand that difference. So we think we can do both. We think we can protect our investors and maintain our franchise as being a preferred partner to private equity firms and for the solutions that we can provide. I don't think it's an either/or. Inevitably, there's going to be -- there may be situations where we need to take action. And there may be a frustration level of one particular private equity firm for that action. But I think when they take a step back, they'll understand it. And in the context of a big, broad platform, we can afford to have some unhappy, specific situations and still have a great business on our hand. So our teams are prepared for that, and I think the sponsors understand that, that's part of this environment.
However, just to leave on a positive note, I think the tone of the conversations with sponsors have been very constructive. The sponsors have significant capital in these businesses. They have a significant dry powder. And they want to protect the businesses and help the companies and make sure they have enough to get through this period of time. And if sponsors stand ready to do that and provide additional capital, we stand ready to work with them and help the businesses get through it and get back our investment and help the sponsors get an extra turn on their equity. So I don't think it's mutually exclusive, and I'd say the tone that we've heard in the last 4 to 6 weeks has been very constructive. And I'm optimistic that we'll all work through this together.
Great. That's very helpful color and insight. One follow-up. I know you guys have been building out the portfolio management resources at the platform, one of the last tiers. So I'm curious how many dedicated investment professionals does Alexis have to support the platform's restructure or portfolio management expertise? And then what does that maybe year-over-year?
Sure. Look, I think, like most direct lenders, in this environment, even my comments about new investments, the entire investment team is essentially focused on portfolio management. So it's not -- the resources we have right now are significant. There's -- there are a handful of folks whose job it is day to day to work through specific portfolio management issues. As I mentioned in my comments, we've taken additional folks who were investment professionals. But essentially, we said put that aside and just become additional resources. And we'll continue to add to those, over time. But it's -- we have plenty of resources, and we'll continue to add -- it's not so much about the number of people, but adding a couple of people that have some very specific technical experience that might benefit us in this period of time.
And at this time, I'd like to turn the call back to Craig Packer for closing remarks.
Okay. Well, look, thanks, everyone, for your time. I know this went a little longer than our typical calls. We really tried to share as much information as we could about what we're seeing and talk about the future in this uncertain time. Appreciate the questions. We're obviously available for follow-ups. Really sincerely wish, everyone on the call, good health for you and your families, and look forward to coming back and updating you on our progress in the future.
Thank you for joining us today, ladies and gentlemen. We appreciate your participation. This concludes our call. You may now disconnect.