Blue Owl Capital Corporation (OBDC) Q2 2022 Earnings Report, Transcript and Summary

Greetings, and welcome to the Owl Rock Capital Corporation's Second Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Dana Sclafani, Head of Investor Relations. Thank you, Dana. You may begin.

Thank you, operator. Good morning, everyone, and welcome to Owl Rock Capital Corporation's Second Quarter Earnings Call. Joining me this morning are our Chief Executive Officer, Craig Packer; our Chief Financial Officer and Chief Operating Officer, Jonathan Lamm, and other members of our senior management team. I'd like to remind our listeners that remarks made during today's call may contain forward-looking statements which are not a guarantee of future performance or results and involve a number of risks and uncertainties that are outside the company's control. Actual results may differ materially from those in forward-looking statements as a result of a number of factors, including those described in ORCC's filings with the SEC. The company assumes no obligation to update any forward-looking statements. We will also be referring to non-GAAP measures on today's call, which are reconciled to GAAP figures in our earnings press release and supplemental earnings presentation available on the Investor Relations section of our website at owlrockcapitalcorporation.com. With that, I'll turn the call over to Craig.

Thanks, Dana. Good morning, everyone, and thank you for joining us today. I'd like to start with our high-level results. We reported net asset value per share of $14.48 down from our first quarter NAV per share of $14.88. This decline was primarily driven by unrealized portfolio markdowns due to credit spread widening experienced across the broader markets. Our net investment income was $0.32 per share, up $0.01 from last quarter. This was driven by continued stable investment income due to strong credit performance and an increase in dividend income. We were also pleased to be able to over-earn our dividend without the benefit of meaningful repayment related income as repayment activity continues to be muted. In addition, the rapid rise in interest rates we have experienced will meaningfully benefit our NII beginning in the third quarter. All else equal, this will drive a further increase in our earnings even if we do not experience an increase in repayment activity in the second half of the year. Jonathan will touch more on this later in the call. During this quarter, we have very clearly seen a transition in the market environment, which has impacted all asset classes as investors are recalibrating expectations given a more uncertain economic environment, continued concerns around the trajectory of Fed policy, inflation trends and the potential course of the U.S. economy have disrupted the markets. In this environment, we think it's important to make a distinction between market volatility and economic uncertainty. Market volatility creates an even greater opportunity for us as a direct lender. As banks have pulled back from providing financing, we have seen an increase in demand for our capital and large platforms like ours have stepped in to provide attractive financing solutions for some of the largest deals getting done. In the second quarter, we evaluated over 20 opportunities for deals over $1 billion in size, which was another very active quarter for these larger deals. In this environment, the certainty of our capital is even more valuable to borrowers, and we are financing deals with better terms, structures and wider spreads. Coupled with higher base rates, we believe these loans for large, high-quality companies offer very attractive risk-adjusted returns for our portfolio. That said, we are highly focused on the current economic uncertainty and its impact on the credit quality of our portfolio. While we are prepared for a recessionary environment, we have not yet seen that materialize in our portfolio, Broadly speaking, our borrowers continue to meet or exceed our expectations for performance, and we have not seen an uptick in credit issues. We continue to have only 1 company on nonaccrual status representing 0.1% of the portfolio based on fair value, one of the lowest levels in the BDC sector, and our annualized loss ratio remains very low at roughly 15 basis points. As an upper middle market lender, we focus on larger companies, many of which are leaders in their markets. Consumer demand remains healthy. And while our companies are experiencing some margin pressure from increases in labor and input costs, they have largely been able to pass through those cost increases to maintain healthy profitability. We focus on noncyclical service-oriented businesses with enduring revenue models and have very little exposure to classic cyclical sectors. Majority of our portfolio is comprised of companies in service-oriented sectors, such as software, insurance and health care, which we believe are more insulated from a broad economic downturn. For example, in our largest sector, software, fundamentals remain strong as software solutions are embedded in their customers' workflows and are mission-critical to day-to-day operations. The majority of these investments are structured with conservative loan to values, typically well below the roughly 45% average of our broader portfolio. Additionally, our team has been rigorously analyzing the portfolio, given the economic uncertainty. We evaluated each of our borrowers based on a number of factors, including labor, commodity price, and supply chain exposure and feel the portfolio is well positioned to withstand economic pressures. We believe we have built a resilient portfolio that will continue to perform well in a changing economic environment. Turning to our activity in the quarter. ORCC had a modest quarter of originations, driven by light repayment volume. We had expected repayments to modestly increase in the second quarter. However, higher rates, reduced refinancing activity and market uncertainty led to a decline in M&A activity. Even though repayments were low this quarter, where we did receive repayments, we were able to redeploy this capital into attractive opportunities. The portfolio at quarter end was $12.6 billion of roughly 75% first lien investments and is well diversified across borrowers and industries. We continue to seek ways to prudently improve returns by targeting specialized lending verticals and -- In the second quarter, we provided an additional $77 million of capital to Wingspire an asset-based lending business in our portfolio to support their acquisition of Liberty Commercial Finance and equipment leasing business. This brings our total commitment to Wingspire to $400 million. Post quarter end, we also announced an increase in our commitment to our senior loan fund which continues to generate attractive returns of roughly 10% to $500 million. In addition, the Owl Rock BDCs, including ORCC, recently announced an equity commitment in Amergin Asset Management. Amergin is a newly formed portfolio company created to invest in a leasing platform focused on railcar and aviation assets. Following the continued growth and success of Wingspire, this platform will also be built organically by a team of industry-leading professionals with a proven track record. Over the long term, we expect these specialized lending investments will provide further upside to our earnings and asset value. Now I'd like to turn it over to Jonathan to discuss our financial results in more detail.

Thanks, Craig. We ended the second quarter with total portfolio investments of $12.6 billion, outstanding debt of $7.1 billion and total net assets of $5.7 billion. Our NAV per share was $14.48 versus our first quarter NAV of $14.88. This was largely driven by the decline in fair value of our portfolio due to market adjustments from the impact of wider credit spreads. The weighted average mark on the debt portfolio was down roughly 1.1%, which caused the decline in NAV of 2.7%, considering the impact of leverage. We finished the second quarter with net leverage of 1.2x debt to equity, which remains within our target range. Our portfolio and outstanding debt remained at consistent levels quarter-over-quarter and the impact of unrealized losses on our NAV drove a modest uptick in leverage. In the second quarter, we had roughly $490 million in sales and repayments and $340 million in new funded investments. As Craig mentioned, our originations for the quarter are primarily a function of repayment volume now that we are at our target leverage. We also ended the first quarter with liquidity of $1.7 billion, well in excess of our unfunded commitments of approximately $1 billion. Turning to the income statement. Our net investment income was $0.32 per share, $0.01 above our previously declared second quarter dividend. For the third quarter, our Board declared a $0.31 per share dividend payable on November 15 to stockholders of record on September 30. Our total investment income for the quarter was $273 million versus $264 million in the first quarter, reflecting a modest increase in interest income, resulting from rising rates and an increase in dividend income. This increase in dividend income was a combination of recurring dividends from our existing investments, such as Wingspire as well as certain nonrecurring dividends from well-performing portfolio companies. Total expenses of $146 million increased roughly $5 million versus the prior quarter, primarily as a result of the increase in base rates on our floating rate liabilities. Turning to our balance sheet. We have a flexible balance sheet with a well-diversified financing structure. As we've discussed before, we believe having a significant portion of our liabilities and unsecured notes is strategically important and maximizes our financial flexibility. At quarter end, $4.2 billion or roughly 60% of our $7.1 billion of outstanding debt within unsecured notes. With respect to rising rates and the impact on our liabilities, approximately 50% of our liabilities are floating rate and exposed to rising rates. Despite the meaningful increase in rates during the second quarter, our weighted average total cost of debt remains low at 3.7%, and we have no maturities until April 2024. As I discussed last quarter, we will see a meaningful benefit from rising rates starting in the third quarter. As you will recall, at the beginning of the second quarter, many of our borrowers reset their interest rate election to 3-month LIBOR, which was approximately 1% at the time and slightly above the average floor in our portfolio. So there was a limited benefit to our interest income in Q2. The second quarter ended with 3-month LIBOR at 2.3%, which meaningfully increased the base rate for those borrowers. Holding all else equal, had our base rates as of June 30 been in effect for the entirety of the second quarter, we estimate NII would have increased $0.02 per share to a total of $0.34 per share in Q2. Additionally, borrowers will continue to reset their interest rate elections throughout the third quarter, which will continue to benefit the yield on our portfolio and be accretive to NII. The asset yield on the portfolio, reflecting base rate elections as of June 30 was 8.8%, up 80 basis points from the prior quarter. Looking forward, holding all else equal, we expect each additional 100 basis points increase in our base rates from the June 30 level to generate approximately $0.04 per share or a 12.5% increase in quarterly NII after considering the impact of income-based fees. Before I turn it back to Craig, I want to underscore the importance of our valuation process to accurately mark each investment in our portfolio every quarter. As I mentioned, our NAV declined due to unrealized losses driven by a widening credit spread environment and is not a reflection of deteriorating credit quality in our portfolio. Evidencing this, our internal portfolio ratings at the end of the second quarter were consistent with prior quarters, with roughly 90% of the portfolio rated 1 or 2, our highest rating categories. Our best-in-class valuation process includes engaging a third-party valuation firm to mark 100% of the investments in our portfolio every quarter. We think this is particularly important for shareholders in a volatile market environment. With that, I'll turn it back to Craig for closing comments.

Thanks, Jonathan. To close, I would like to provide some commentary on current market conditions and address the economic outlook that we know is top of mind for investors. As I mentioned before, the market volatility has been beneficial to the direct lending market opportunity. When the Fed started to raise interest rates in mid-March, it prompted heightened volatility and a sell-off across asset classes that has persisted since then. As a result, there has been a noticeable shift in the supply-demand dynamics for private credit solutions. Many direct lenders entered this period fully invested and with lighter repayment volumes, capital available for new deals is more constrained. As a result, demand from borrowers for private credit solutions now exceeds available capital. Our platform remains one of the largest providers of direct lending capital. The continued growth of the broader Owl Rock platform, which today has over $55 billion of assets under management and our ability to write large checks keeps us front of mind with sponsors and borrowers -- we continue to see robust deal flow. The second quarter was our third most active quarter since inception, with over $7 billion in originations across the platform. As ORCC repayments increase, we will be able to redeploy those proceeds into an even more attractive opportunity set. With the public leverage finance markets effectively shut more borrowers are turning private credit solutions. Although the volume of M&A activity is down, we continue to see attractive opportunities at better terms and better structures with spreads on new deals widening out 100 basis points or more. This is demonstrated by the weighted average interest rate of new commitments in the second quarter of 9.5%, up more than 200 basis points versus the first quarter. We continue to see this momentum in the third quarter and across our platform, have a robust pipeline of committed deals that we expect to close on in the second half of this year. We believe we have demonstrated our ability to source attractive deals through the various market environments. But as I have said before, the credit quality and the performance of our portfolio will remain our highest priority in this new phase of the economic cycle. As a lender, we are focused on the downside, so we are preparing for a potential recession. While we can't forecast what the timing or impact of recession will look like, we are assessing all new opportunities through the lens of a possible economic downturn. We are also well prepared to work with our borrowers to protect our investments in the event of economic challenges. We have a rigorous portfolio management process and maintain active dialogue with our borrowers, which we believe enables us to identify any early signs of challenges. While our borrowers have reported building inflationary pressures, many of them have been able to pass on these costs to maintain stable profitability. We are appropriately cautious on the economic outlook, but take comfort that we have purpose built the portfolio to withstand macroeconomic pressures by focusing on upper middle market businesses in noncyclical sectors. We believe the portfolio is also structurally insulated due to our primarily senior secured first lien investments, which benefit from a conservative loan to value on average of roughly 45%. The portfolio further benefits from diversification with an average position size of 60 basis points today, down from 110 basis points 3 years ago. Despite the uncertainty of this economic environment, we believe ORCC remains well positioned. As I outlined before, the market supply-demand dynamics are favoring direct lenders. We expect net investment income to grow in the third quarter based on interest rate elections already made to date. Further, we may see additional increases in net investment income in the fourth quarter our freights continue to rise or repayment activity increases. In addition to those positive trends, we are also increasing our commitments in our specialized lending verticals. These vehicles are delivering high returns, which we believe should further enhance ORCC's earnings power. We believe these tailwinds will ultimately benefit our shareholders in the quarters to come. I wanted to close by highlighting that based on where ORCC is currently trading and based on our stated dividends, ORCC stock is yielding 9.6% on a portfolio of well-performing, primarily first lien term loans, which we think is a compelling relative value in the current environment. And with that, thank you all for joining us today. Operator, please open the line for questions.

[Operator Instructions] Our first question is coming from Ryan Lynch from KBW.

First question I had was, Jonathan, in your prepared comments, you mentioned that dividend income was up pretty meaningfully this quarter. You mentioned that was a combination of just higher recurring dividend income via like Wingspire, but then there was also some nonrecurring income dividend income in the quarter. Could you maybe quantify, help us understand how much nonrecurring income that occurred this quarter just so we can kind of model out a better run rate for that going forward?

It was about $6.8 million. It was [ 1 ] dividend from -- dividend income from 1 portfolio company.

Okay. Perfect. And...

And just -- sorry, just to make a point of it. Because I think it's important. The dividend we got was from PLI, which you may recall, is one of the only credit problems we've had in our history. It's early, but we now own 100% of PLI. We're managing the company. It's recovering quite nicely from its challenges. And so while it's still early, it had really good results, really good liquidity, we were able to take the dividend out. But it gives you a sense of the direction of PLI. And again, one of the only companies who've ever had challenges with is now heading in a really solid direction.

Okay. That's good context as well. And that's good to see that performing much better and starting to pay you back as kind of [indiscernible] testing strategy. How [indiscernible] how you guys decided to go into that space. Did you guys hire a team to do that? Or do you guys kind of peel people away from other places in the firm? And then just kind of longer term kind of talk about like 2 years out, obviously, incredibly hard to predict, but like what are your hopes like 2 years out for what sort of size that this strategy can grow to and the potential returns they can generate just ballpark, obviously?

Sure. So we get approached all the time about opportunities in specialized lending verticals and most of them don't meet our criteria. -- although we like them, we're really sticklers for the right combination of market opportunity and team culture. We were approached and had a dialogue with the team that had worked together previously in another alternative asset platform that has decades of experience in this space, and they were looking for financial backing and thought our capital base would be ideal an ideal partner for them. And so we had long discussions and got to know them extremely well and felt they were really ideal type of opportunity because we really like their the conservative approach to investing in a space that can be challenging for others. So they've done this for a long period of time. They're very risk averse. They're going to take a highly diversified approach to investing in rail and aircraft but really not about capital accumulation, but just really picking their spots. And so just fit, and we think we can get really nice returns and we'll be able to grow it. What's different here versus Wingspire is, Wingspire we invested completely out of ORCC. And in this investment, we invested out of multiple funds. So while we think the opportunity to scale it is significant, that growth will come not only in ORCC, but in other funds, so we do expect it to grow, but it may not scale quite to the size of Wingspire given ORCC's ownership stake is only a portion. So without getting too they haven't put a dollar in the ground, so it's all sort of hypothetical, but I would say I wouldn't expect it over time to match Wingspire in its size. But over the next couple of years, if we had [ $200 million ] working, I think that would be a terrific outcome. But it's going to take time. So it's -- I don't want to overstate it.

Yes. Okay. That's good background on that. And then just one more, if I can. Your core sort of dividend -- or excuse me, your core sort of earnings that have increased quite meaningfully recently. And then I do really appreciate the commentary of Jonathan you provided on kind of where you are from a rising base rate standpoint, how that would have impacted Q2 earnings. But -- so as we look kind of going forward and the way interest rates are expected to go higher from there, it looks like operating earnings should be well above the dividend for the foreseeable future and potentially even accelerating. So could you just remind us what overall the Board or [ Owl ] company's policy from a dividend payout standpoint? Because I believe you guys are going to be over-earning by quite a bit. So you could just remind us on how you guys are thinking about core dividends versus supplemental dividends in conjunction with core NII?

Sure. I think it might be worth just to -- just go through the math a little bit, if you don't mind, just we'll go through it just to make sure everyone's square because there's a couple of moving pieces. And Jonathan, if I get any of this wrong, correct me, we reported $0.32, about [ $0.015 ] of that is the PLI dividend. So I would kind of back that out from core earnings because that as we're acknowledging is a one-timer Jonathan talked about in the script, just based on elections already made to date, that adds about $0.02, and we will get additional benefit from rates as borrowers continue to take, make new elections in the third quarter. So directionally, we're not sure exactly what that will add, but for the purpose of this intellectual discussion, say that at least $0.01, so that gets you to about $0.34. And it could be higher, it could be lower. I'm just giving you the building blocks to think about it. And then we would expect to get additional benefit in the fourth quarter where if rates stay where they are now and you get the full benefit in the fourth quarter, then there'll be some additional benefit and Jonathan [ gave it a ] 100 basis points and $0.04 so if you can kind of work up your own number from there. We're -- and that's all assuming modest repayments, which we're -- I had expected them to pick up by now, but they haven't. So we're not baking in an increase in repayments anymore because it's just we're not sure when it's going to happen. And so that's, I think, a good framework to think about it. We will have conversations with the Board. We have conversations every quarter. And we -- if we get comfortable as they're suggesting that the rate environment is going to stay where it is, Credit remains strong. The outlook we're significantly over-earning our dividend. We'll have the conversations with the Board and consider options. I think that, obviously, everything is on the table could just look to increase the base dividend or we could go to some more special dividends based on increases. Is this going to be so situation specific at the time, so it's hard to really totally speculate. Right now, everyone appropriately is sort of envisioning this rate environment and this rate environment staying here for the foreseeable future. And it's quite possible by the end of the year, there's a different view on the rate environment. So I can promise that the Board is very engaged and we want to continue to deliver great returns for shareholders. And if we're comfortable that the earnings continue to be good, we would look seriously about ways to share that with the shareholders. So I don't know if that answers your question, but that's about it.

No, no, it's a very helpful framework for how you guys are thinking about it.

Next question today is coming from Robert Dodd from Raymond James.

Just going back to the specialized lending. And I mean obviously, Wingspire Liberty Commercial Amergin, I mean, obviously, these are going to be enormous individually, I mean they won't be sizable. But what -- by the addition of Amergin and your comments, I mean you clearly haven't stopped looking at other opportunities to add these asset-backed verticals. So could you give us any color? I mean what would you like that to be as a percentage of the portfolio. I mean, obviously, first lien is now 75%, but Wingspire still only about 3.5% of assets of the portfolio. So can you give us any more color on how much you'd like that type of high return, high security with asset-backed and sort of cash flow back loans to be as a percentage of the mix?

Yes. It's a good question. I don't have -- I won't give you -- I don't have a precise answer. But you're right, in directionally, Wingspire and the senior loan fund are in 3%, maybe 4%, 3.5%, 4% ZIP code, each when they're fully invested. I think each of those we could continue to grow mid-single digits, could it get to 6%, 7% a piece? I mean I -- we're going to be driven by what we see as the market opportunity. If we continue to see in Wingspire and a senior loan fund, the opportunity to invest in an asset class, we're really confident in where we can generate 10-plus percent ROE to our shareholders. And we're confident that's sustainable. I think that's terrific for ORCC, and we will continue to add capital. So really guided by the opportunity set not by some broad portfolio construction top down. I think that Amergin, as I mentioned, probably isn't going to get to the same size just because we're splitting it amongst other funds. I guess what I would observe is there are peers of ours that have 20-plus% of their portfolio in these types of assets and do quite well with them. And so I think we're -- there's plenty of room for us to grow in this if the opportunities are there and maybe add additional verticals, and it's quite accretive. So I if the combination of all these over the next couple of years got to be closer to 10% or 12%, it would be very accretive, but still much less than other peers, and I think plenty of room to run. So we haven't ran really sat down. It's so opportunity-driven rather than portfolio. The last thing we're going to do is give sort of like give a target and then how people chase to it that aren't the return. So we're going to be disciplined about it. I'm really, really proud of what the Wingspire team has built. We built that from scratch and it took years and we're patient and I remember those early calls, you guys would press me what's it going to be what's going to be. And it's just going to take time. We are not -- we're building this for the long haul. -- but you're really seeing the fruits of that effort and we're going to continue to plug the way at it. Amergin will be, hopefully, some more success.

And just to touch on that, I mean, it took Wingspire, I think, roughly 2 years before it made it a significant commitment of capital on your before it made its first distribution. Is that the kind of time frame it's not going to be 6 months before Amergin [indiscernible].

Amergin I think could be a little faster than that. I haven't put a dollar out, the team is working -- the team has been getting ready. And so they're an established team that have been working together previously that know each other well. So there's not the hiring space, if you will, they're ready together. And so I suspect it will -- we'll have the opportunity to be in the market faster than Wingspire. But I can't be more precise than that until they get their website up and get the machinery going. So stay tuned, but I would bet it's probably a little bit faster because they are probably without taking anything away from Wingspire. I think this team is probably a little closer. They're starting now. They're not going to spend 6 months. They're starting now.

Next question is coming from Casey Alexander from Compass Point.

I just kind of want to make sure that I understand the dynamics of what I'm looking at and have relatively worthwhile expectations for the future. When I look at the unrealized losses that you took in this quarter and the previous quarter, they totaled about $240 million. But understanding your comments I would guess that most of those are recoverable over time as these positions work their way back to 0, absent any credit issues that could pop up. But if they don't, we should expect to see most of those unrealized losses reversed in future periods as these physicians work their way back to par and kind of eliminate some of the marks that you've taken for spread widening. Am I thinking about that correctly?

You are.

Absolutely. Look, we're -- we think -- Jonathan set up, I just want to underscore it. Since inception, we've taken the approach, we mark every name every quarter. We use an outside third party to do it, I think it's a best-in-class process. And -- but in quarters like this, the market is off, there's a material spread widening. And so we -- the offsets get marked down, but they are unrealized losses. Our credit performance continues to be exceptionally strong. And if those loans ultimately get repaid at par, then we'll get 100% return of those unrealized losses. Yes, you're right, losses could pop up. but the overall credit quality is still very strong, and we feel really good that we're going to get a vast majority of that back when the loans get repaid or spreads tighten back down. I mean, it doesn't have to -- we could pop back, and we've seen that. We saw that post-COVID, right? I mean it all widened out to pose during COVID and then it popped back 2 quarters later.

Well, I think the market should appreciate the banner in which you mark your book with a great deal of integrity. And I just want to make sure that investors realize that there's, call it, $0.60 a share of embedded NAV in the fact that you've done so with your book. And so this should -- I would certainly factor that into my valuation going forward.

The next question is coming from Kevin Fultz from JMP Securities.

Portfolio of credit quality is in great shape with only 1 investment on nonaccrual, are there certain verticals you have exposure to that you view as more at risk in the current environment, whether that's due to inflation, labor challenges, geopolitical risk or recession peers, which you are monitoring more closely as the macro environment continues to evolve.

The answer is really no. There's no particular sectors. I mean we have been very consistent since the beginning, we like recession-resisting companies, we like stable cash flows that are going to hold up despite whatever economic environment. And if you look at our top 5 to 7 sectors and you chartered every quarter since inception, you'd see they're remarkably consistent in software and insurance, in health care and food and beverage. So there's no -- we sent -- obviously, given what's the economic worries and inflation, we had the team. Our team did a great job. We did a deep dive on a number of all the variables you just described. European exposure, commodity price exposure, labor cost exposure to really make sure that we had a really firm handle on the risks in the portfolio. And we came away very encouraged by what we saw. There's no particular sector that we have heightened anxiety on. We certainly have some companies that have some raw material exposure or labor exposure relatively modest -- really modest percentages that we are at heightened risk. Our watchlist, if you will, our [ 3 4 5 ] rated names continue to be in the same ZIP code that we've been at for really the last couple of years. And so it tends to be more idiosyncratic. I would say, where do we pay the most attention to? The companies that have consumer exposure, the companies that sell through big box retailing or the supermarkets. Those are the ones I'd say we keep an eye on them, given fears about weakening consumer demand and potential cost pressures. We lend to big companies. These companies have been proactive to push through price increases, get ahead of it, and they seem successful doing so. And so we're cautiously optimistic, but we recognize the environment is uncertain. So I don't have any particular sectors I'm worried about. We just tend to have particular credits that are on our watch list.

Okay. That all makes sense. And then one more, just looking at new investment equipments on Slide 5 of the presentation. The weighted average interest rate on new investment equipments was 9.5% this quarter, which is up about 210 basis points from prior quarters. Can you just quantify how much of that increase was due to spread widening on new transactions as it appears that asset mix didn't materially change?

Sure. I mean it's obviously a light quarter, but it's about it's about split rate -- underlying rate, 50-50 underlying rate and wider spread. But I'm glad you asked about that number because I think it's a pretty attractive number and by your calling people [indiscernible] attention to it. The average rate we're getting on our new investments is 200 basis points higher than a quarter ago. And what I'm happy to share is that's the zip code we're investing in, in the third quarter as well as we're signing up new deals, this is where unitranche is coming. It's coming close to 10%. So it's really -- as we put on new investments, it's a really attractive environment. Unitranche today coming close to 10% versus 7%, not that long ago. That's a very meaningful move on the direct lending environment. And that's why we're so excited about the opportunity set that we're seeing right now.

Next question is coming from Mickey Schleien from Ladenburg.

Craig, I wanted to briefly follow up on Wingspire. Maybe this is quarter to remind us who are its customers. And as an ABL lender, to what extent does the economic volatility we're experiencing actually create a tailwind for Wingspire?

Sure. So Wingspire's borrowers are companies in a variety of industries. They work with both sponsor and nonsponsor backed companies. They are -- they tend to be -- the companies that Wingspire lending to tend to be smaller than the company's allotment to. I would say it's more classic middle market or even lower middle market. But no, it's just a diversified customer base but they're an asset-based lender. And this is -- and they do a terrific job and their underwriting, first and foremost is ensuring that there's enough assets to support the loan, and they will also look at other appropriate credit metrics on the health of the borrower. But it's one of the reasons why we like that space. And I would expect the opportunity set. So in this environment, they will also get the benefit of rising rates, obviously. But I would expect that just them to get increased demand from customers who may be going through challenges in their business and have to pivot to an asset-based lending solution versus a cash flow solution that they might otherwise have preferred or where banks may be cutting back. I don't think the Wingspire team hasn't reported to me. I say early shoots of opportunity there, I expect it to be to increase over time. They have a very nice pipeline. We really like the acquisition of liberty fits them quite nicely, and so that opens up the equipment finance vertical for them. But I would be hopeful over the next 6 or 9 months, as if we have the kind of economic challenges that many expect, that, that will be bullish for Wingspire to continue to find good deals and more spread.

That's helpful commentary, Craig. One other question for me this morning. There's been a lot of discussion today in this call about the directionality of interest rate. We can all look at the forward curve, it actually has rates coming down towards the end of next year. But I've been around long enough to know that I don't think the market knows but rates will be a year from now or 2 years from now. But my question is, in terms of risk management, given that rates certainly in the near term, to climb or have already climbed meaningfully, what the portfolio sort of average cash interest coverage ratio? And where would LIBOR or so for Fed funds or whatever you want to talk about, have to go before you get concerned about interest coverage?

Sure. So interest coverage, EBITDA and interest coverage is in the high 2s today with a 300 basis point rate move, it would get down to about 2x directionally. So we have plenty of room. And some of our borrowers have hedged or in some way, shape or form. I would not have perfect data on that. So some of them may have some mitigants on that. But I think directionally, what I would say is for the kind of rate increases the market is expecting, our borrowers should -- they'll certainly have less cushion, but they should be -- have an appropriate cushion to continue to service their debt and despite the kind of rate increases that we're talking about.

The next question is coming from Kenneth Lee from RBC.

Just one quick one about the comments about robust deal flow. If M&A and refinancings are slowing down, what's driving the deal flow there?

Sure. The high-yield market and the public leveraged loan market are basically shut. And so while overall M&A activity is down, a portion of that activity that's going to direct lenders is up significantly, the banks are basically not writing new leverage finance commitments. Many of them are sitting on commitments that they've made previously that they're unable to sell, which makes them quite reluctant to sign up for new commitments. And so the sponsors are coming directly to the direct lenders and particularly to us for financing their deals. And there is M&A activity. So for example, yesterday, Thoma Bravo announced it's a private of the company called Ping Identity. That's a financing that we are leading earlier this week, New Mountain announced an acquisition of some assets from a public company, PerkinElmer, another financing we're leading for our deals, and we are getting first shot at them and getting really attractive spreads and better structures and better terms. And the other thing that we're pushing for is we recognize market conditions may change. So we're trying to get more call protection because we want to make sure as we put capital out now, we get the benefit of that. So the other -- kind of the other point I would make, and I think it's an important one. There's been a lot of concern over the last couple of years as the amount of capital raised in the direct lending space has grown whether there's too much capital in the direct lending space. A lot of folks have asked about that. And we've always felt that, that concern was misplaced given the massive amount of money in private equity. And you're seeing it now or seeing that, that concern was misplaced because in fact, today, there's not enough capital in private credit to satisfy the demand that we are seeing from the private equity firms. So I think it's an important evolution of the direct money market that sort of deserves some acknowledgment of just -- it is still an environment where there's more dollars from the private equity firms the need for sizable platforms like Owl Rock to solve their financing needs.

Great. That's very helpful color there. Just one quick follow-up for me. In terms of the specialized lending platforms, sounds like a potential benefit on the return side there. I wonder if you could just talk a little bit more about how it changes potentially the risk profile for ORCC.

I don't think it changes the risk profile for ORCC. We are -- again, we're -- the positions in the individual platforms are moderate in size and in the context of a $12.5 billion fund, each position we have is really in a portfolio that has many other sub positions, so we're not taking any single name risk. The leverage that we put on the senior loan fund on Wingspire ultimately on Amergin is modest. And so I don't -- and I've already mentioned that others have dramatically more exposure and the market seems to think that, that's totally attractive. So I don't think it really changes the needle for us at all.

Our next question is a follow-up from Casey Alexander from Compass point.

Yes. Just a minor point. I noticed that there was about 750,000 or so shares repurchased during the quarter. Was there a special circumstance surrounding that repurchase? Because it seems like kind of a one-off.

Well, we look at it, our Board has approved us repurchase to shares and we will look at it. We'll look at where the shares -- where the stock is trading. And if we think that it's an attractive use of our capital we will pursue share repurchases. Obviously, we're balancing that against where we can invest the money. One thing I just want to -- without going so detailed that my legal team will let me afterwards, we are bound by certain windows based on our reporting when we can and can't purchase shares. And so it doesn't -- we don't always have as much flexibility about when we can do it relative to the market opportunity as folks might realize. And so we -- I've just highlighted a minute ago, we're investing unitranche at 10%. We can put money in the specialty verticals at 10%. So we have to balance that versus the shares, but there are times that the shares we think, are very attractive, and the Board has been receptive to us pursuing that, and we'll continue to look at that as an avenue. But I would expect it to continue to be modest in size because we think our capital is precious. And right now, we're getting great returns from investing it.

Our next question is coming from Derek Hewett from Bank of America.

Could you provide a little -- some color on the Pik revenue since it's about, I think, roughly 12% or so and it's I think it's doubled on a year-over-year basis. And at what level would it start to be concerning for you guys?

Sure. So the vast majority of our Pik interest is from deals that we structured as Pik at the time of underwriting because in particular, in the tech and software space, companies were growing rapidly, and the sponsors would like the flexibility to plow all their cash flow, if you will, into growth. And so they ask for that flexibility and we, for the right situations, are willing to do that. A much more modest portion of it is from credit issues. And so this is something that we are willing to do for extremely good credits with really low loan to value and good pricing in the software space in particular, where most of them are -- checks all those boxes. And so it's not a function of sort of like poor credit quality. And obviously, when the loans get repaid, we collect all the cash from the Pik that has been growing. And so there are we haven't set a bound to it. If it's grounded a little bit higher, it wouldn't bother me too much. We obviously have a massive amount of liquidity at the ORCC. So no liquidity issue, not a credit issue, we can get great returns by offering that flexibility is something that we're willing to consider on a case-by-case basis.

We reached end of our question-and-answer session. I'd like to turn the floor back over to Craig for any further closing comments.

Great. I appreciate the questions. I appreciate the interest. We're really pleased with the quarter, but even more, we're pleased about the outlook. Hopefully, we made that clear today. Happy to have any follow-up questions from folks, if you have them. Thanks for your time, and enjoy your day.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.