Blue Owl Capital Corp
NYSE:OBDC
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Blue Owl Capital Corp
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Good morning, and welcome to the Owl Rock Capital Corporation's Second 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 Capital Corporation's filings with the Securities and Exchange Commission. The company assumes no obligation to update any forward-looking statements.
As a reminder, this call is being recorded for replay purposes. Yesterday, the company issued its earnings press release and posted an earnings presentation for the second quarter ended June 30, 2020. This presentation should be reviewed in conjunction with the company's Form 10-Q filed on August 4 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 second quarter earnings call. This is Craig Packer, and I am 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's joining us on the call today. We hope you and your families are safe and well.
I'll start today's call by briefly discussing our financial highlights for the second quarter before providing an update on what we are seeing across our portfolio in this challenging economic environment. Then after Alan covers our financial results, I will conclude by discussing our outlook and current market conditions.
Getting into the second quarter financial highlights. Net investment income per share was $0.34. We ended the quarter with net asset value per share of $14.52, which is an increase of 3% versus the prior quarter, primarily reflecting a reversal of a portion of the unrealized losses we took last quarter as we have seen credit spreads tighten meaningfully from the end of the first quarter. This NAV is in line with the estimated range that we pre-released on July 13.
Looking forward, for the third 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. We have 2 additional remaining $0.08 per share special dividends, which have been previously declared for the third and fourth quarter of this year.
Regarding our balance sheet, we remain very well capitalized with over $2 billion in liquidity today. That said, we continue to be cautious on capital deployment in this environment, and so we continue to maintain one of the lowest leverage profiles in the space, with leverage ending at 0.6 this quarter. In June, we received shareholder approval to decrease our asset coverage requirement to 150%, which will allow us to achieve our revised leverage target of 0.9 to 1.25 debt-to-equity and operate with meaningfully more cushion to our regulatory cap.
Lastly, the third and final lockup of our stock came off on July 20. At this point, 100% of our pre-IPO shares are freely tradable. Although we don't feel the current stock price reflects the true value of the portfolio we have created, we are pleased to have moved through the lockup period with limited disruption to our stock price, which we believe continues to highlight the long-term orientation of our shareholder base.
Now I'd like to provide an update on our portfolio. While the effects of the economic shutdown related to the COVID-19 pandemic, which is beginning to be felt at the end of the first quarter, the second quarter reflects a full quarter's impact. As such, our top priority has remained protecting the value of our existing investments. I spent significant time on our first quarter call detailing our enhanced portfolio management process, and we have been very pleased with the outcome of this approach. Information flow with our borrowers remained strong, and we continue to receive frequent updates from our companies. Overall, we feel very good about the quality of our portfolio and its performance despite the economic challenges.
I'd like to remind everyone why we believe our portfolio is well positioned to weather these uncertain times. We ended the second quarter with $9.2 billion of investments at fair value across 102 borrowers with an average investment size of less than 1% of the total portfolio. Our investments consist primarily of first lien term loans to upper middle-market businesses with an average EBITDA of $93 million. Since inception, we've aimed 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. We lend primarily to private equity-backed companies, which we find attractive because private equity firms can support their companies with financial and operational resources.
In line with last quarter, our 6 largest sectors are software, insurance, professional services, health care providers, distribution and food and beverage, which collectively comprise approximately half of our portfolio. We continue to believe this is a solid core group of sectors that continues to perform well even in the current economic environment as many of these businesses provide essential or nondiscretionary services. To date, our borrowers in these segments have demonstrated resilience and, by and large, continue to perform well.
Looking beyond our 6 largest sectors, the vast majority of our borrowers continue to have reasonable performance even in this highly unusual environment. Although it's still early in the economic disruption, what we have seen so far, we believe, validates how we have positioned our portfolio. As expected, this quarter, we saw an increase in discussions with our borrowers and their private equity owners about covenant levels and liquidity needs. To date, these discussions have been very constructive and, in a number of cases, have already led to concrete actions, which improve our borrowers' balance sheets.
We have needed to negotiate amendments in a relatively modest amount number of credits in the context of the size of our portfolio. We executed 8 significant amendments during the quarter in which we provided covenant modifications or liquidity runway, sometimes by allowing a borrower to pay a portion of interest in kind rather than in cash for a period of time. In exchange, the borrower's financial sponsors put in additional equity in almost all of these situations. In most of these, we also received enhanced economics such as increased spread, fees or call protection.
We amended roughly $500 million of investments this quarter where we received additional economics, which added an average -- added on average an additional 120 basis points of spread on those investments. We are pleased with the strength and capacity of our portfolio management and workout resources, which have allowed us to work through these complex situations.
Overall, we did not see a material change in our internal credit ratings metrics this quarter. The percentage of our portfolio, which is a 3 or 4 on our internal rating system, is 13% for the second quarter, up only slightly from 12% in the first quarter. We also saw some names continue to outperform our expectations and were upgraded to our highest rating category. 9% of the portfolio is now rated as a 1 versus 7% in the first quarter. Names in our 2-rated category, names which are performing in line with our expectations, continue to account for over 75% of the portfolio. Further, we continue to have no names in the lowest-rated 5 category, and we continue to have no loss of original principal on any investment since inception. Another measure of our portfolio health is that less than $950 million or 10% of the portfolio is marked below $0.90 on the dollar today. Further, only 1 debt investment is marked below $80 million.
Our most COVID-impacted borrowers, which make up a majority of our 3- and 4-rated investments, operate across several different industries. However, for the most part, they have ultimate end-market exposure to either of 2 broad segments: discretionary consumer spending or the travel and hospitality space. The discretionary consumer spending end market primarily includes businesses with physical locations, which were impacted by temporary store closures and stay-at-home orders. Many have seen some pickup in activity as the economy reopens, although it's still early. The travel and hospitality sectors face a longer road back to historical levels. The companies most impacted here include the ones in our aerospace and defense sector as well as businesses whose end market is driven by travel.
As of quarter end, each of our 102 portfolio companies were current on their interest. PIK interest represents less than 5% of total investment income for the year-to-date period. We have one situation where we have agreed with the borrower to delay the interest payment past quarter end, while we, the borrower and the sponsor, are working on a broader amendment package.
As previously disclosed, at the end of the second quarter, we placed 2 names on nonaccrual status: GeoDigm Corporation, also known as National Dentex; and CIBT Global. The aggregate exposure of these names is approximately $165 million or less than 2% of the total fair value of the portfolio. We are working closely with both companies and their financial sponsors to help the companies through these difficult times as well as maximize the value of our investments. This is the first time since inception that we've had names on nonaccrual. However, we have certainly always understood that there would be challenges over time with a hopefully small number of names in our portfolio. We believe that the focus of our portfolio management and workout experts will allow us to navigate these challenges in a proactive and holistic manner.
Turning briefly to our origination activity. During the second quarter, new investment fundings were $308 million and net funded investment activity was $142 million, which was net of $166 million of sales and repayments. As we anticipated coming into this quarter, our originations were more modest as activity in the market slowed, and we remain cautious given the macroeconomic environment. That said, we are pleased to add 3 new borrowers to our portfolio. As you'll see in our earnings presentation, the weighted average spread of the new investments this quarter was 7.4%, roughly 100 basis points higher than our current portfolio spread.
I'd like to spend a moment highlighting one of these deals. We provided a $300 million unitranche loan to Checkmarx in what was one of the few transactions to take place during the height of the pandemic. Our financial flexibility and ability to provide certainty enabled us to support the buyout of this leading software security provider by Hellman and Friedman in a $1.2 billion transaction. The acquisition will bolster Checkmarx' already outstanding growth at a time when software security has never been more critical for modern enterprises building out their software solutions.
I'll also highlight one of the names that was repaid this quarter. Give and Go is a leading provider of frozen baked goods. We don't disclose ratings on individual names in the portfolio, but I can say that at one point during the course of our investment, this name was 3 rated on our internal rating scale. The company was sold to a strategic buyer in early April, and our loan was fully repaid. This example is evidence for our thesis that larger companies, even if they encounter challenges, should prove to be more durable and to benefit from increased strategic value and exit opportunities.
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, as Craig noted, we hope that you and your families are all safe and healthy. We thank you for your continued partnership and support. I plan to take everyone through our financial results for the quarter and then touch on some of the important topics I covered last quarter as they continue to be very relevant in the current environment.
To start off, and you can follow along on Slide 7 of our earnings presentation, we ended the first quarter with total portfolio -- second quarter with total portfolio investments of $9.2 billion, outstanding debt of $3.5 billion total net assets of $5.6 billion. Our net asset value per share increased to $14.52 as of June 30 compared to $14.09 as of March 31, a NAV increase of approximately 3.1%. 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 $0.34 per share. All of that was for our second quarter.
On the next slide, Slide 8, you can see total investment income for the second quarter was $190 million, down from $205 million last quarter. I'll talk about this a bit more in a moment. Net expenses for the second quarter were $61.7 million, up from $56.4 million last quarter. This increase was driven by 2 items related to interest expense in the second quarter. The first item was a noncash acceleration of upfront costs related to the full paydown of SPV Asset Facility 1, which contributed $2.5 million in onetime interest expense this quarter. The second item was our average debt during the second quarter was higher than during the first quarter, hence, increasing interest expense in the second quarter. All of this led to net investment income, or NII, for the second quarter of $129 million, down from $146 million last quarter.
Also, as a result of the fair value of our portfolio increasing from 93.5% to 95.1%, we had $175 million of net unrealized gains during the second quarter. Our other operating expense ratio continues to be among the lowest in the industry at 24 basis points on a trailing 12-month basis, and we have $0.11 per share in undistributed distributions as of June 30.
To drill into our income interest -- investment income and interest expense results a little more, I think it's helpful if we talk about our asset liability rate sensitivities for a moment. As you can see on Slide 13, our NIM analysis, our average portfolio spread is flat at 6.3% March 31 versus June 30. But our yield has decreased from 8.4% at March 31 to 7.9% at June 30. This is driven by the continued decline in LIBOR. The weighted average LIBOR floor on our investment portfolio is 85 basis points. We saw floors generally kick in towards the end of the second quarter. You can also see on this slide that our cost of debt continues to come down driven also by the decline in LIBOR. Our cost of debt declined from 4.2% at March 31 to 3.6% at June 30.
So pulling the lens back for a moment, although the decline in LIBOR affects both our investments in a negative way and floating rate debt in a positive way, we have over $9 billion of floating rate investments and a little over $2 billion of outstanding floating rate debt or, on a committed debt basis, a little over $4 billion. On either basis, you can see why a sharp decline in LIBOR has an adverse impact to earnings.
And just to put into perspective the LIBOR landscape over the past 6 months, at December 31, 3-month LIBOR was 191 basis points. For the first quarter, average 3-month LIBOR was 153 basis points. And for the second quarter, average 3-month LIBOR was 59 basis points. And today, 3-month LIBOR is sitting around 25 basis points. That's a pretty drastic change in a short amount of time. Based on when LIBOR elections were made and the LIBOR decline over the past few months, we will see a little more pressure on interest income in our third quarter results before it flattens out.
To wrap up our discussion on our financial results. As we look to the end of this year, we think it would be helpful to provide everyone with a reminder about our fee waiver and special dividends. As a result of the fee waiver our adviser put in place in connection with our IPO, we declared 6 quarterly special dividends, starting in the third quarter of last year and running through and including the fourth quarter of this year. You can all see all of our dividends mapped out on Slide 17 of our earnings presentation. Our fee waiver expires during October of this year, and our adviser is not extending or renewing the fee waiver.
I mentioned earlier in my remarks that our NII for the second quarter was $0.34 per share. If you were to impact this amount for the full effect of fees, our 1.5% management fee and 17.5% performance fee that will be in effect starting in the fourth quarter of this year, our NII this quarter would have been $0.24 per share. I would note this obviously does not take into account continued growth in our portfolio between now and the fourth quarter. Craig will talk more about our dividend coverage shortly.
I also wanted to review some of the key topics I covered last quarter, including our financial philosophy and funding profile. We continue to be well positioned in the industry given the strength of our balance sheet. Our 3 structural pillars of low leverage, significant liquidity and unsecured debt have provided comfort to our stakeholders through this crisis to date and has allowed us to keep an extreme focus on the health of our portfolio, the most important aspect of our balance sheet. We had very intentionally built a very well diversified financing landscape, diversifying the number of facilities we have, the types of facilities and the number of lenders we partner with. Matching duration between the left and right sides of our balance sheet is another important aspect of our landscape. Our weighted average debt maturity is over 6 years, and we do not have any debt maturities until June of 2023. As it relates to our financing activity, we were very active this quarter. You can see an overview of all of our financings on Slide 16 of the earnings presentation.
To sum up our activity, we completed our fourth CLO financing from one of our drop-down SPV facilities. We added commitments to our senior secured revolver, taking total commitments here to over $1.3 billion. And last month, we completed our fourth unsecured public bond issuance. We continue to have one of the lowest leverage levels in the industry at 0.6x debt to equity. As of June 30, we had $2.4 billion of liquidity pro forma for the $500 million bond issuance I just mentioned.
In total now, we have issued $2 billion of unsecured debt, which brings us to a funding mix of 56% unsecured debt. Because of this, we continue to have a meaningful amount of excess collateral for our secured facilities, and we continue to have a significant cushion to our new regulatory asset coverage of 150%. As we have previously mentioned, our updated target leverage ratio is 0.9 to 1.25x debt to equity. Overall, our funding profile is very sound, and we continue to be in a very good position.
Thank you all very much for your support and for joining us on today's call. Craig, back to you.
Thanks, Alan. I will close with some thoughts on our dividend coverage and our investment outlook. First, I would like to pick up on Alan's comment regarding our earnings as we look ahead to the expiration of our fee waiver in the fourth quarter. When we prepared for the IPO of ORCC about a year ago, we set our regular dividend at a level we felt we could comfortably support from an earnings standpoint as we continue to ramp our portfolio to our target leverage while maintaining our strong focus on credit quality.
While we remain pleased with the quality of our portfolio, the current economic climate is clearly having an impact on the earnings power of our portfolio and resulting ability to cover the dividend out of net investment income. The main challenges have been lower interest rates and slower investment pace. At the time of the IPO, LIBOR was approximately 200 basis points higher than it is today. We had hoped to be at our target leverage by now, but originations have lagged our historical pace primarily because of our cautious approach to investing. We also continue to see a lower pace of repayments than expected. As a result, sitting here today, we would expect net investment income to trail our regular dividend level upon the expiration of our fee waiver in the fourth quarter.
The key factor to help us address this shortfall is ramping our portfolio to our target leverage level, which should boost our earnings power. Although getting to a fully ramped portfolio is the main driver, we also see opportunities to increase spread, including higher spreads on new investments, improving spreads on existing investments as well as gradually changing our asset mix to favor more unitranche loans. It will take some time for us to achieve our target leverage and have a fully ramped portfolio, but we expect by the second half of 2021, we will be operating in our target leverage range and able to cover our regular dividend from a net investment income even in today's rate environment. Until then, we expect to be able to continue to pay our regular dividend of $0.31 per share as well as our previously declared special dividends. These comments are forward-looking and, therefore, inherently uncertain. We hope to achieve this goal sooner but want to be transparent as to what our current expectations are once the fee waiver expires.
I'd like to spend the last few minutes discussing our perspective on current market conditions. Business conditions improved in May and June as stay-at-home restrictions eased. However, the environment remains uncertain, and we remain cautious about the economic recovery, which we believe will be slow and uneven. That said, given our significant liquidity and strong origination capabilities, we are seeing some very interesting opportunities to provide financing to companies seeking enhanced liquidity and new capital. Overall, the deal flow and pipeline are picking up compared to the more muted activity in the first and second quarter. New private equity M&A flow has increased, which should lead to greater market activity in the second half of the year.
Now that we have a better sense of the effects of the economic slowdown upon our investments, we've been able to ship some attention to selectively deploying capital. We're excited about the current opportunity set, which provides higher spreads, increased call protection and strong documentation while allowing us to continue to invest in the same types of high-quality, durable businesses we have focused on since inception.
While the current environment is challenging, we believe it highlights the strength of our team, platform and balance sheet. Based on our unique capabilities, we believe we are well positioned to continue to increase our market share as private equity firms turn to us for sizable, customized direct lending solutions with certainty. More broadly, we expect direct lending will continue to take share from the syndicated market as we see banks pull back from making new commitments and increasingly large deals are being done in the private market.
In closing, we believe that our portfolio has proven so far to be resilient in the current economic environment. The certainty of our significant capital is extremely valuable and positions us to be a financing partner of choice in these uncertain times. Our team continues to work hard to protect our current portfolio of investments and to identify attractive opportunities to grow our asset base. While the environment has created some near-term earnings headwinds, our credit performance continues to be very strong. Ultimately, as a result, we believe we will be able to deliver strong long-term returns to our investors without deviating from our strategy or sacrificing credit quality.
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] Your first question comes from the line of Chris York with JMP Securities.
Craig, certainly appreciate the forward-looking comments on earnings and the core dividend with respect to the expiration of the fee waiver. Now the manager has been very supportive of the vehicle historically. So could you just update us on the manager's appetite to temporarily waive fees to bridge the dividend shortfall until you grow the portfolio to potentially offset any book value declines?
Thanks, Chris. Look, we -- as you say, we've been extraordinarily supportive. You should not expect that we're going to have additional fee waivers. We haven't charged any fees since the inception of ORCC. And our shareholders have benefited from that, from substantial special dividends. And so Alan made -- in his comment, Alan made the comment, and I'll reiterate, you should not expect additional fee waivers. We do, however, think that there are a number of levers in our portfolio that will allow us to earn the dividend. I'm happy to go through those. But by getting -- primarily getting to our target leverage, even today's interest rate environment, we expect to be able to cover the dividend. We also see opportunities to improve spread in the portfolio. At some point, our repayments will pick up. And so those factors, we think should be sufficient to cover the dividend on an ongoing basis. And if there were to be any shortfall, we think it would be very modest and very short lived. But I want to be clear and not to be repetitive, you shouldn't expect us to extend the fee waiver.
Very well, and I apologize for missing Alan's prepared remarks about that. So moving on, you talked a little bit about the validation of your portfolio and a little bit on the business model. So does the resiliency and strong enterprise value growth in tech companies during this time -- and validation, in my view, it supports the buyout of tech companies via growth funding -- does it cause you to reconsider your allocation policy of 20% and potentially increase that higher going forward?
Look, you are right. Our software businesses, we're extremely pleased with their performance. They have continued to grow even during the pandemic. They may not be growing as fast as they were previously, but they continue to grow. They really benefit from some of the trends, stay-at-home work, remote work. Many of our businesses are benefiting in the software space. So it's our largest sector, not by accident, we really like those deals. They have the most attractive economic features, lowest loan-to-value, best covenant packages. We very much value the diversification of the portfolio. And so I don't have a -- I don't want to signal a change to that approach. I think we're going to remain very focused on diversification. I think that there's still -- we have a capacity for additional software buyouts. We obviously did one this quarter. But I think that we're also sensitive to having overall industry diversification. So there's some room for increase, but we're not anticipating a significant rethink to our approach to diversification.
Got it. And then a couple of housekeeping items. There was a meaningful change sequentially in the excise tax. Maybe Alan, could you enlighten us on what the drivers on that change were?
Sure. That's just going to be a matter of quarter-over-quarter where our taxable income was versus our GAAP income.
And just for modeling, should we expect more of a Q1 or a Q2 kind of excise tax going forward?
I think going forward, it's probably more of a 1Q.
Okay. And then lastly, you've got a payable -- a sizable payable on the balance sheet. Can you give us any update on how the pipeline looks in terms of originations as well?
Sure. It's been picking up steadily over the last couple of months. I won't be concrete with you or give you precise numbers. But I would say, as stay-at-home orders began -- started to lift, we saw some resumption in private equity M&A sale processes. We saw deals that got put on pause as COVID broke. In certain instances, buyer and seller have kind of resumed discussions back to where they were just pre-COVID. And so we are, I would say, meaningfully busier certainly than we were in the back half of the first quarter and the first half of the second quarter. It's certainly not back to where it was in last year, but we've seen a mean meaningful pickup, and I do expect deal activity to be higher in the third quarter than the first 2. And my guess is higher again in the fourth quarter.
So the back half of this year, I think you'll see a nice pickup in deal activity, obviously dependent upon pandemic and all the other factors. But the activity, private equity firms have a lot of capital, valuations are very high. Obviously, the public equity markets are back to all-time highs. And so that supports significant valuation for sellers of private equity assets. And so you're seeing resumption of deal activity, which should help us in terms of deployment.
And your next question comes from the line of Ryan Lynch with KBW.
Kind of following up on your commentary regarding pipeline and market activity. You said it was kind of picking up versus where it was kind of in the depths of the downturn several months ago. As we look forward, what do you think has to occur before deal volumes can return to more normalized levels that we saw in 2019? Do you have to get some sort of vaccine, do you think? Or do you just need to have business travel start to resume, if that's any hindrance that you can't really have these face-to-face meetings. Just any thoughts or commentary you'd have on what it's going to take before deal volumes from a market standpoint start to resume to more normalized levels like we saw in 2019.
Sure. I mean it's a great question, obviously. A tough one to answer, but I'll give you some thoughts. I might just simply start by breaking deal volume into 2 separate buckets. There's new -- there's M&A transactions where companies are getting sold to new buyers. And then there are refinancing or liquidity-driven transactions where a company just raises capital. The refinancing and liquidity transactions can happen right now. Companies owned by private equity firms or not owned by private equity firms may just need additional liquidity to -- because of the environment or they may want to refinance their balance sheet. Those are fairly easy. It doesn't require a change of control. There's an existing lender group or -- and there's an established guidance sheet. So those can happen right now.
And then there's M&A where buyers -- new buyers and sellers. Obviously, the bar is much higher for a new M&A transaction where a new equity owner is coming in. I think that the private equity firms are able to buy companies now. Travel is not the constraint. We'll figure out a way to do that in a way that's appropriate. And that is not the hindrance. I think the greater issue is simply in this -- given the uncertainty of the path of COVID and the economic recovery, for certain businesses that their visibility and their durability are clear enough that a buyer and seller can agree on value. But there are many businesses that even though stay-at-home offer -- orders are lifted, the outlook for their businesses is still cloudy. And so they just face an uncertain near-term future. And so it will be difficult for buyers and sellers to agree on value. The buyer's going to want to pay a low price, the seller's going to want to wait for a recovery. And so I think as greater confidence comes for the economy more fully reopening, which obviously a vaccine would be one significant factor, you'll get resumption.
So there's certain sectors where -- like, for example, we were active in the second quarter. Software, insurance, food and beverage, you don't need a full throated economic rebound for -- to get conviction around those sectors. There are other sectors, businesses exposed to the consumer, businesses exposed to travel and entertainment, where it's going to be a choppy road back. And so in those sectors, you may see liquidity-driven financing, but you're not unlikely to see M&A. Where does all that lead us? I think the second half of this year will be greater than the first half. I would assume the first half of 2021 is greater still. And at some point, when you see a real resumption of economic activity in the country, then we'll get back to where we were pre-COVID. I know that I haven't said anything precise. I wish I had a precise answer, but I think that's a framework for how to think about it.
No, that's extremely helpful color. And then -- and just looking for your opinion because nobody really knows what's going to happen, but that's definitely helpful. Regarding sort of terms and structures on new deals going forward, I'm just curious to also get your thoughts on that just because, clearly, there are a lot of lenders out there who are in more shape than they were and are capital constrained during this downturn, so that restricts the amount of capital that can come into new deals. However, because deal flow has slowed down so dramatically, it still feels like there could be a decent amount of capital still chasing after too few of deals, kind of the same problem that we had back in 2018, 2019, although it's a much different environment where we had a lot of capacity to lend to companies. Do you see big changes in deal terms and structures given the sort of muted deal volumes going forward?
I do. I do. And we demonstrated that this quarter. Spreads are wider. They're materially wider. I would say, directionally, depending upon the credit and depending upon whether it's first lien, second lien or unitranche, the 150 basis points wider in spread, additional fee, additional call protection, good covenant packages, lower leverage, lower leverage points, I think the deals that we're doing today are meaningfully better economically and more attractive from a credit standpoint. And I think that reflects the first part of your question, which is 2 things. One, a number of the smaller lenders, they just -- they're having issues, and I think they've got challenges. And not just smaller lenders, a number of lenders are having challenges in their portfolio, had very few. There's a number of lenders that have significant challenges. If you've got a lot of challenges in your portfolio, you really are not in a position to extend new capital. We are, we have and we'll continue to do so.
But in addition, the pie is bigger. We are taking share from the syndicated market. Bigger deals are coming into the direct lending space. Because banks are nervous about underwriting, sponsors are placing a greater premium on certainty. So I think the hardest part for us is just finding credits that we really like and that we think are going to meet our specs and perform well. But when we find them, we are -- we're well positioned to get them and we're getting better terms. And look, there's always going to be some measure of competition in any part of the financial markets. But I think our competitive set, particularly for the larger check for the upper middle market, private equity-backed company with certainty in size, $200 million, $300 million, $400 million, $500 million at a clip, I think we're one of the few. We don't need to be the only one out there to provide those terms and get deals. And by the way, we're perfectly happy to partner with one or 2 other direct lenders that are like-minded with us. We don't need to do 100% of every deal.
So I think the opportunity set is attractive. I think the harder judgment is the economic recovery. We've had the ability to originate a lot of deals over the last 4 years. I expect we'll continue to do so. It really is a question of our conviction around credit quality.
Okay. That makes sense. And then just one last...
Hey, Ryan, you cut out there. I think, Ryan, if you're still there, I think -- at least I can't hear you.
[Technical Difficulty]
Why don't we go to the next in the queue, and we can pull Ryan back up.
Your next question comes from the line of Robert Dodd with Raymond James.
Actually, a follow-up to Ryan's question. So if you could take an attempt at breaking down, as we go into the second half of the year, you talked about activity is going to pick up, hopefully, maybe more on the M&A side as well. I mean on your prepayment and accelerated amortization, which was obviously low this quarter, not really surprisingly in this environment, what do you think it takes deal environment-wise, given spreads are wider, structures are tighter, so there's less incentive to refinance -- unless you're not going to save any money, there has to be another driver, maybe an M&A transaction or a forced refinancing, what does it take for that kind of activity to pick back up? And what's the visibility of any of that happening in, say, the second half of this year?
Sure. Look, I think it will pick back up. I think the drivers of it, you're right, this is not an environment where you're refinancing to try to save rate. M&A buyouts are the biggest driver of refinancing. A company gets sold, refinances its balance sheet. But companies are also acquisitive. Buy-and-build strategies are very prevalent for financial sponsors where they'll buy a company in a sector, and they'll grow it over time through acquisition. Oftentimes, at some point in that growth, the company gets big enough that it makes sense for them to refinance. Obviously, maturities play a role. And companies need to refinance their balance sheet. Companies don't wait until the last minute to do that. Everyone, I think, got a nice and -- a pretty profound scare with COVID. And so I think companies that -- we delayed refinancings for the first half of this year. And there are going to be companies that as the window opens up for them to pursue them, even if the cost is higher, they're going to have to consider that because the world is an uncertain place, and you can't just simply do your refinancing at the last minute.
So I -- look, we are in an incredibly unique time. Hopefully, we can all agree on that. Refinancing -- repayments are going to pick up in the second half of this year, barring some return to the level of economic stress we felt in March and April. They're going to pick up. I think it will be -- we're assuming a modest pickup in the third quarter and then additional pickup from there. But our debt has hard maturities. Sponsors want to return capital to their LPS. If their companies are doing well and they were sitting on a gain, they're going to be looking for ways to monetize that, recap, sell the company, what have you. And so I -- it's not likely we're going to be in an extended period where there's just no repayments, in my opinion.
Got it. And if I can ask one more unrelated. On the SPV, the extra expense as you terminated the SPV 1, are there any more expected early terminations or any refinancing structures over the next, call it, the second half of this year and into next year? Or is the existing one going to continue to exist through the life? Are we going to get any other big onetime expenses in the interest expense line?
Yes. It's a good question, Robert. Hopefully, this isn't viewed as a big item. It is about $0.005. But over time, yes, you can continue to see us take down these SPV facilities. We had a huge task early on, which is we raised a tremendous amount of equity, and we needed to raise a tremendous amount of debt in order to match that and get levered and stay levered. And so over time, you should continue to expect us to do CLO financings out of these facilities and, over time, close the facilities as they're no longer needed, we could do a CLO financing right off our balance sheet. So over time, we will expect to close a few more of these.
Our next question comes from the line of Mickey Schleien with Ladenburg.
Craig and Alan, I wanted to ask another question about the tone of the market. In your remarks so far, you mentioned that spreads are currently wider versus the pre-COVID levels. But when we think about the amount of private debt capital that's been created over the years, how concerned are you that your competitors will begin, at some point, to chase deal flow and drive those spreads down again while, at the same time, the forward LIBOR curve is basically flat, which could potentially develop into a lot of pressure on portfolio yield.
Look, at this point, the floors for all the lenders are really going to cover LIBOR. It really isn't a variable at this point. I think all lenders have a certain return expectation they're trying to deliver to their shareholders, just like we are. And I think that, that serves as a bit of a guide point for any lender when they're lending out capital. We want to generate a return for our investors. While there's been creation work, creation of private credit, it's really a fraction of the creation of private equity. Private equity is -- has -- the growth of private equities dwarfed the growth of private credit. That's what drives demand for the product. In addition, private credit is taking market share from the syndicated market. So the pie is growing. It's certainly a big enough pie and a growing pie to find attractive risk-adjusted returns for high-quality, upper middle-market managers like ourselves, and more than one, a few high-quality ones that are good.
There's still very few firms that can write the size check that we can, despite all the capital that's been created. I think that's a significant driver of who private equity firms like to work with. In this environment, they want to move quickly. They want to move confidentially. They want to work with firms that can write a $300 million, $400 million, $500 million check themselves. They don't want to build a club of 8 lenders that can each do $50 million, and that serves us well. So I think we and other high-quality managers want to deliver attractive returns for our investors. Obviously, and I admit my bias in this, in this extremely low interest rate environment, we think that our fund, and I would say other high-quality BDCs, offer an extremely attractive risk-adjusted dividend yield and return versus other investment opportunities. And so I think that -- I'm not sure that's totally realized at this point.
I recognize there's concern about losses. On the margin, if spreads get chipped away by 25 or 50 basis points, it will still be the case that we can offer and others can offer an attractive risk-adjusted return. It's obviously relative to something and the relative -- at this point, it's relative to 0. Right now, it's not a concern. Right now, we can do really the deals we want to do. It's just a question of our credit bar, and we can get very attractive spreads right now. In the environment you're describing where spreads are getting contracted, it's likely an environment where the economic news is getting better. The portfolio is healing up. I mean there's -- these things don't move in a vacuum. I don't think there's an environment where spreads rip tighter, and we're still in a really difficult economic environment. That, I do not think, is a high risk.
Okay. I think I'm clear on that answer. And I just want to follow up with your -- you mentioned LIBOR floors. Have you started to see any pushback by your portfolio companies, either in terms of new deals or in refinancings in terms of LIBOR floors? If I'm not mistaken, they were sort of 80, 85 basis points on the upper middle market and probably 100 basis points in the lower middle market. Have they started to request lower floors?
We're not going to do deals without LIBOR for us. Borrowers request a lot of things. But they could push back all they want, we're going to insist on a LIBOR floor. We have 85 basis points. I think in the market, that's an average. There are a few deals in there that have 0% floor. So that's why the average is where it is. But I would say market at this point is 100 basis point floor. The vast majority of deals get done there. And I think most lenders -- I think almost all lenders will insist upon that at this point, and the borrowers will pay it.
Okay. Lastly, I'm just curious, and I'm assuming everyone is still working remotely, how do you approach underwriting without the ability to go out and kick the tires in terms of your underwriting process?
Yes. It's a good question. It's a tough one that we're all facing in every walk of economic life in this country. Our team has done an extraordinary job of managing through this. And the private equity firms face the same issue. Look, many of the businesses we lend to are not asset-intensive businesses. So the tires that you're suggesting to be kicked in many businesses, it's as much the financial statements, talking to the management team, talking to the sponsors, independent collaboration. We can go see companies. We have the wherewithal to do that. The sponsors are selectively visiting companies as well. Obviously, there are many companies in our portfolio today that we know intimately well, and that's less of a pressure point. But it does create a higher bar for certain businesses where, to the extent we can't go see it, it will be a gating item that we might not be able to do a financing.
We have -- look, we have tremendous resources at our disposal, not only our 60-person investment team, but we work with extremely high-quality accounting, consulting firms around the world, but certainly around the U.S., and we can bring whatever resources to bear we need to. But if there's a small business that has a single plan and we can't go see it, that could be a reason we turn that deal down in this environment. So it's something we've worked through. We're not going to sacrifice our diligence for anything, but we think it's workable and it will continue to be workable.
[Operator Instructions] Your next question comes from the line of Casey Alexander with Compass Point.
Most of my questions have been answered or are maintenance questions, but I will ask one. You mentioned software. You guys were early to the software area. But it seems as though software now is on the to-do list of every venture debt fund and almost every traditional BDC that we see. Have you seen any change in the competitive dynamics of software deals because there are people that do seem to be chasing that particular vertical? And then secondly, are there any new verticals that have occurred to you that maybe you might not have thought them attractive before, but because of this environment, it creates a new opportunity set within a new vertical that you hadn't approached in the past?
Sure. On software, look, it has been a sector that we have had a lot of conviction now for several years, and we've built out a substantial effort, including having a separate dedicated fund at Owl Rock that does lending to software businesses. I won't repeat the comments I made earlier about the attractiveness of the space. I -- it's a -- it is probably the most active space for private equity. The deal volume and deal activity continues to grow. We -- without repeating everything I said, I think we're very well positioned not only because of the size of the check we can write, but our team has many years of experience underwriting businesses. Owl Rock as a platform has only been around for 4.5 years. But the senior leadership of our tech and software team have been underwriting software investments for 15, 20 years apiece. And they've seen many of these companies multiple times. They have an intimacy around their business models. They've seen what works, what doesn't work. And so I think that is a core investment skill set that we have that is very differentiated and not easily replaceable.
It's not simply just wanting to do a software deal, you have to understand credits, what makes them different. They're not all the same where lumping them all into a category, it's obviously much more complicated than that. And so we are -- we continue to find the terms, the economic terms. And the deals and the demand for us to do those deals is very weighted in our favor. We've had a lot of success in that space. I -- there is competition. It is an area that several other BDCs have been active in, and there's plenty to feed each of us. And if there are new entrants, I think there's room for that. But it takes a lot of investment. It's not just money. You've got to have a significant team. You've got to have relationships with the private equity firms. You have to have an expertise in the deals and understand the difference between them.
Private equity firms like to go to lenders that are just learning about a space. They want to work with lenders that understand the space. If there's problems, they've got a lender that they can work through. So I don't see a big change in the competitive environment, but we can certainly withstand some additional competitors. But the price of admissions is a very large fund, writing a very large check with a very large investment team.
In terms of new verticals, look, nothing, like, leaps to mind particularly. I think you can see our 6 biggest sectors. I think that in this environment, there are certain sectors that it's just -- we're more confident to underwrite in. And there are certain sectors that probably are changed in our view. I'll use aerospace and defense as a sector that we like a lot and understood very well and pick good companies in that sector. But obviously, nobody could have envisioned the kind of environment affecting air travel that there is today. So that's a sector that we like before. And just the world changed, and we're going to have to look at it differently. In terms of new opportunities, it's just businesses that are going to hold up well in this environment, I think, is really the underlying theme. I don't really have any precise area. And candidly, even if I did, I probably wouldn't broadcast it to the whole world.
And your next question comes from the line of Kenneth Lee with RBC Capital Markets.
Just a follow-up on the originations outlook. I think last quarter, you talked about expecting some origination volumes mainly to skew towards existing borrowers versus new borrowers. And I saw that you added some 3 new borrowers this past quarter. Wondering if you would just share some of your thoughts about whether you could still see most of the origination volumes leaning towards existing versus new borrowers in the near term.
Sure. Yes, a quarter ago, we really were focused on the existing portfolio for obvious reasons. We knew the companies, the environment was very uncertain. I would say our posture has shifted now. We're very open to new situations. We are -- I don't want to paint a picture that we're aggressive now. I think that we went -- in the second quarter, I would say, we went into a really defensive mode where we only did new transactions. We -- very few and the ones we had extreme level of conviction on. I think at this point, we're more open-minded about new opportunities, and you should expect us to have a more balanced approach between existing portfolio companies and new investments.
So I think that assuming that the COVID and economic situation doesn't take a sharp turn for the worse, I think we have a very good handle now on needs in our portfolios -- needs of our portfolio in terms of dollars and situations that are going to command a lot of attention. Many of them -- most of them will not. And so it gives us the confidence to deploy capital. We've also raised more capital, getting the unsecured deal done a few weeks ago. I just think we feel on more solid footing to add new names to the portfolio. Again, moderate, I want to give you a moderate sense. We're not opening the spigot up, but we're taking a spigot that was pretty closed and turning it on at a moderate level in light of the still choppy economic environment.
Great. Very helpful. And just one follow-up, if I may. It looks like amendment activity was still very modest this past quarter. Just wondering whether it could remain at very modest levels going forward? Or do you expect any kind of pickup there?
Yes. Look, as I said in my comments, we were pleased that while we had 8 significant amendments -- it's modest in the context of 102 portfolio companies, I don't expect, sitting here right now, a significant pickup from that number. The amendment cycle tends to pick up as the quarter wears on for obvious reasons. Sitting here right now, it's relatively quiet, but I would expect some pickup as the quarter wears on. I would have to imagine that the second quarter of 2020 will go down as high-water mark for amendments among direct lenders given the magnitude of the economic shutdown. But I -- so sitting here right now, I don't expect a big pickup from here. Again, it speaks, in my opinion, to the high-quality companies we lend to that just didn't -- we had 8 challenging situations and the rest of the companies, they're doing just fine, and they didn't require amendments. And there may be some additional ones in the third quarter, we'll see, but it's -- I expect it will remain a modest number on our overall portfolio.
Now I'd like to turn the call back over to Craig for closing remarks.
Great. Well, thanks, everyone, for dialing in. I hope you and your families are doing well. We appreciate your time and attention. We're always available to you to answer questions about our company. We like having an informed investor base. And hopefully, your businesses and our businesses will continue to improve over the next 3 months and look forward to talking to you at the end of the third quarter.
Thank you. This does conclude today's conference call. You may now disconnect.