Earnings Call: Q2 2021

Aug 5, 2021

Good morning, and welcome to the Alrock Capital Corporation Second Quarter 2021 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 forward looking statements as a result of a number of factors, including those described from time to time in Al Rock Capital Corporation's filings 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 Ancoated Earnings Presentation for the Second Quarter Ended June 30, 2021. 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 the presentation available to you. The earnings presentation is available on the company's website. I will now turn the call over to Mr. Craig Packer, Chief Executive Officer of Albrock Capital Corporation. Thank you, operator. Good morning, everyone, and thank you for joining us today for our Q2 earnings call. This is Craig Packer and I'm CEO of Alrock Capital Corporation the Co Founder of Blue Owl. Joining me today is Alan Kirschenbaum, our CFO and COO Jonathan Lamb, a recent addition to our senior management team Dana Stefani, our Head of Investor Relations. I'll start today's call by briefly discussing our financial results for the Q2 the call. Before providing an update on the portfolio and the quarter's deal activity. Afterwards, Alan and Jonathan will cover our financial results in more detail, And then I will discuss our outlook and then make some closing remarks. Turning to our Q2 financial highlights. Net investment income for the quarter was $0.30 up from $0.26 per share in the Q1. We made substantial progress towards covering our $0.31 quarterly dividend and remain on track to cover it in the second half of the year. This was driven by a significant increase in both originations and repayments and continued strong credit performance. Our Board has approved a 3rd quarter dividend of $0.31 per share. We ended the 2nd quarter with net asset value per share the of $14.90 up $0.08 from the Q1. Credit quality remains strong with an average fair value of 98 the Consistent with prior quarters. We are very pleased with the origination activity we saw this quarter, which represents our 3rd largest quarter since inception. As a result of this activity, our net leverage increased to 1.0x, approaching the midpoint of our target range of 0.9 to 1.25 times. We also saw our pace of sales repayments accelerate to 743,000,000 the with repayment levels now approaching fully ramped levels. Finally, I would like to take the opportunity to formally introduce Jonathan Lam, Jonathan, who many of you already know. Jonathan will become the CFO and COO of ORCC effective September 1. Jonathan brings a wealth of knowledge and more than 20 years of experience, most recently as the CFO of Goldman Sachs' BDC. We're excited to have him on board and he will be discussing our Q2 financial results in greater depth shortly. Turning to originations, we were extremely pleased with our activity this quarter, both in terms of volume and quality. Originations were up significantly from last quarter and exceeded Q4, driven by the strong performance of our investment team the and a pickup in M and A activity as a result of the continued strong economic backdrop. Gross originations for the quarter the We're $1,600,000,000 with $1,400,000,000 of funded activity and net funded originations of $663,000,000 Our average spread on new commitments was approximately 6 70 basis points, up from 6 40 basis points last quarter. Our overall spread increased as a result of our ability to originate some higher spread unitranches, the particularly in the software sector as well as an increase in 2nd lien investments and a new preferred investment. We are pleased with our success at increasing the average spread on our investments over the last year, which is now roughly 20 basis points higher than it was a year ago. We believe this reflects the strength of our origination capabilities and relationships and the continued attractiveness of our direct lending solutions. Along those same lines, we have talked in prior quarters about how we had not yet reached a normalized pace of repayments. The payment volume was up meaningfully this quarter We are quickly progressing towards our expected fully ramped pace of repayments, which will positively impact earnings. We finished the quarter with an investment portfolio of $11,900,000,000 across 129 portfolio companies and we are pleased with our strong credit performance. The overwhelming majority of the portfolio continues to perform very well with 93% of debt investments the marked above 95% of par. Most of our borrowers have returned to normalized operating levels and many experienced strong performance in Q2. While we are closely monitoring COVID developments, we have a positive outlook for the overall economy in the second half of the year to the As consumer demand further rebounds, we believe this will continue to drive good results for our borrowers. We continue to see sequential improvement in names in our lowest rating category, those names rated 4 or 5. These have decreased from 1.9% to 0.5% of the portfolio quarter over quarter. While we continue to have a small number of challenge credits, Our non accruals remain extremely low with only 2 investments on non accrual status at the end of the quarter, representing less than 0.5% of the the portfolio based on fair value, one of the lowest levels in the BDC sector. Before I turn it over to Jonathan to discuss our financial results, I'd like to take a moment to discuss 2 recent announcements we made. A few weeks ago, we announced an increase in capital commitments to our joint venture loan fund, Sabayo Lake. The The fund has generated an attractive average quarterly ROE over the past 3 years of approximately 10%. The ORCC increased its commitment to $325,000,000 and in addition increased its economic ownership to 87.5% from 50%. We are also excited to bring in Nationwide Life Insurance as a new partner in the JV. Nationwide has been a meaningful ORCC shareholder since the reception and purchase the remaining 12.5 percent economic interest from UC Regents effective June 30. The Regence remains a very significant ORCC shareholder and a valued long term partner across the broader Blue Owl platform. In conjunction with these changes, the joint venture will be referred to as ORCC Senior Loan Fund going forward in our disclosures. I also want to touch on the CFO transition we announced this week. Effective September 1, Jonathan will become the CFO and COO of ORCC. Alan will remain an officer of the company as an Executive Vice President and serves as the CFO of Blue Owl, the parent of ORCC's advisor. Jonathan comes to us with tremendous experience as a BDC CFO and I'm excited to work closely with him going forward. I would also like to thank Alan for his extraordinary contributions to ORCC since inception. Alan has played a critical role in the great the success we've enjoyed to date by building a best in class operational and financial infrastructure for ORCC, which we believe to be one of our key competitive advantages. Al will now say a few words before turning it over to Jonathan. Thank you, Craig. Good morning, everyone. To begin, I echo your comments, Craig. We are thrilled to have Jonathan on board with us and know that his deep experience and wealth of knowledge will serve ORCC very well. Before I turn it over to Jonathan to go through the results, I'd like to briefly reflect on how we strategically approached the construction of ORCC's balance sheet. ORCC now benefits from what we believe is one of the strongest funding profiles in the industry. Given ORCC's scale since inception, We knew it was critical to have a diversified financing landscape and we embarked on building a balance sheet that would provide financial flexibility an ample liquidity from multiple financing sources. In addition to developing a large diverse bank group that provides us with 1,500,000,000 the of revolving credit capacity. We have also issued almost $4,000,000,000 across 8 unsecured bond deals And over $1,500,000,000 across 6 CLOs to efficiently finance our balance sheet. We have been able to meaningfully improve pricing since our first issuance I am confident with Jonathan as CFO and COO, ORCC will continue to optimize its financing profile and deliver strong risk adjusted results for our shareholders. With that, I'll turn it over to Jonathan. Thank you, Craig and Alan for the kind words. I'm excited to be part of the team and look forward to talking more with all of our investors and our other stakeholders. We ended the second quarter with total portfolio to the Q1 of 2019. Good morning and welcome to the Q1 of 2019. We have made investments of $11,900,000,000 outstanding debt of $6,400,000,000 and total net assets of $5,800,000,000 the Net asset value per share increased to $14.90 as of June 30, compared to $14.82 as of March 31. We We ended the quarter with net leverage of 1.0 times debt to equity, approaching the midpoint of our target range of 0.9 times to 1.25 times with $2,200,000,000 in available liquidity. Our dividend for the 2nd quarter was $0.31 per share the call. And our net investment income was $0.30 per share. Total investment income for the Q2 was $249,000,000 the up from $222,000,000 in the first quarter as a result of a $22,000,000 increase in interest income, the Reflecting the progress we made in net portfolio deployment as well as from an increase in prepayment related income. On the expense side, management and incentive fees were $69,000,000 reflecting continued growth in the portfolio the interest expense was $54,000,000 up from the prior quarter as we modestly grew our leverage. I I would highlight that we had $1,800,000 of non recurring interest expense related to the acceleration of upfront deferred financing fees the as we continue to optimize our financing costs through the restructuring of 1 of our CLOs. Turning to the balance sheet. We're pleased with the continued growth of our unsecured financing, while we continue our efforts to reduce our borrowing costs. The We capitalized on strong conditions in the unsecured bond market during the quarter, raising $950,000,000 across 2 deals at attractive spreads. In addition to the long 5 year that we issued in April, we raised an additional $450,000,000 in a 7 year bond which priced to the fixed coupon of 2.78. This is our first 7 year bond and should help us to enhance the laddering of our debt maturity profile. As of June 30, more than 60% of our outstanding borrowings were from unsecured debt. We will continue to look for to the opportunities to optimize our liabilities, which may contribute to positive NII growth in the future. For context, the unsecured bond pricing levels have improved over 100 basis points since we began accessing the unsecured market And we believe there is additional improvement we can capture on future issuances. With that, I'll turn it back to Craig for closing comments. Thanks, Jonathan. To close, I'd like to touch on the market environment and discuss our outlook for ORCC in the second half of the year. We are really pleased to have delivered on a number of the objectives we have talked about in prior quarters. We are now well within our target leverage range to the and continue to grow the portfolio, which has allowed us to make substantial progress towards covering our dividend. Despite a competitive market backdrop, We're able to deploy capital into attractive investments and drive incremental yield in the portfolio. The pace of repayments also resulting in a meaningful increase of prepayment related income. Our credit performance remains extremely strong and is amongst the best in the sector. The opportunistic financings and improving financing spreads have allowed us to continue to lower our overall cost of funding. We are encouraged by our visibility on the Q3 and expect another very solid quarter of originations. In In terms of repayments, we also expect another strong quarter, which should again generate meaningful prepayment income in Q3. Given our strong origination activity, we are confident we will be able to offset repayments by deploying the capital into new originations at attractive to the next question. Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve. Good morning, and welcome to the next question. Thank you, Steve. Good morning, and welcome to the investments in funds like our senior loan fund or equity investments in companies like WingSpire as well as select the Capital and Equity Co Investment Opportunities. However, protecting our principle is paramount to everything we do. In terms of the market opportunity, while we have seen some increased competition and result in spread pressure, We are very pleased by the continued growth in demand for large direct lending solutions, in particular unitranches. The Private equity firms are choosing direct loans for more of their large deals, which plays to our strength since we generally favor bigger companies for our portfolio. This year, we have already evaluated more than 20 opportunities over $1,000,000,000 in size And invested in or committed to 8 of these and continue to evaluate others. This trend continues to accelerate And is creating exciting opportunities for large direct lenders like Alrock. We believe we are especially well positioned for this due to our scaled platform the full suite of financing solutions and a large, deeply experienced team with strong relationships in the financial sponsored community. Before I wrap up, I want to touch briefly on the Blue Owl transaction which closed on May 20. OwlRock now operates as a division of Blue Owl We're excited about the growth of the platform and the opportunities that the expanded business will provide over time. We will continue to use the Alrock name and will maintain the same focus that we've had since inception, which is providing customized financing solutions to borrowers and financial sponsors. We look forward to continuing to execute on our long term plan to optimize ORCC's portfolio and balance sheet to achieve compelling risk adjusted to the returns and a stable attractive dividend for our shareholders. Thank you for joining us today. We appreciate your interest in ORCC and look forward to speaking to you again next quarter. Operator, please open the line for questions. Thank you. At this time, I would like to the question and answer session. Your first question comes from the line of Devin Ryan from JMP Securities. Your line is open. Great. Good morning, Craig and Alan, and welcome, Jonathan. First question here, So clearly another very strong quarter of portfolio grade growth. You're now at one times leverage within reach of covering the dividend. Now that you're at one times, the now that you're at one times and I'm sure have a little bit of a clearer picture on earnings power of the portfolio. Can you maybe share your thoughts around intermediate the term leverage range that you consider optimal in the current environment? Sure, Devin. Look, we our range is 0.9 to 1.25. I think we're comfortable operating anywhere within that range. As you know, we're now at one times on a net basis. We think we're comfortable being there. And frankly, I would expect that we would operate somewhere between there and 1.1 on in sort of center of gravity. To the We look around, the portfolios can certainly support that. We're very focused on keeping really strong ratings from the rating agencies. We're in to the communication with the agencies and believe that we'll continue to have good investment grade ratings in that range. It's obviously very dependent on flows in any one quarter, so could dip a little higher, dip a little lower depending upon when deals land within a quarter. But I 1 to 1.1 is probably the right range for folks to be modeling in. Again, could be a bit higher or lower. Okay, great. Very helpful. And then just a follow-up, maybe touching on your prepayment activity And the outlook, I know it's episodic, so a bit hard to predict. And I heard the quarter to date comments, but are you seeing any change in some of the factors that have been driving the to the drivers that have been driving elevated activity. Is there as you look out beyond maybe the next quarter or 2, do you think that the The trajectory could shift a bit and any other color there would be helpful. Thanks. Sure. So we get repaid the most typical reasons we're getting repaid are the company is getting sold and the buyer redoes the capital structure, company goes public And uses IPO proceeds to repay debt. Company grows through acquisition and gets to a size where it makes sense to refinance. And then occasionally we get refinanced either in the direct market or in the syndicated market to just lower costs. That's the mix. I would say right now and I haven't I'd have to go back and study it, but my sense just From my seat is, there's a lot of M and A activity, where sponsors, the velocity of companies the the velocity of the sponsors are buying and selling companies has picked up in part because of the much stronger economic conditions. And so as the economy has picked up, M and A spirits are kindled and buy sellers are thinking it's a good time to sell, buyers are thinking it's a good time to buy. And so we're just seeing a really nice pace of M and A activity that results in the companies getting bought and sold from oftentimes from one sponsor to another or Certainly, companies get sold from financial sponsors to strategic buyers as well. But the sponsors that got properties that to during COVID, M and A activity slowed. We're still, I think, feeling the catch up effect of that as the economy has recovered and sellers are finding the businesses have recovered. It's a good time to sell. So I don't know if that Gives you a flavor for it. So a little more M and A oriented. Obviously, the financing markets are strong. So financing activity is good. The IPO market, it's a mix of all of those things, but to Appreciate it and I will leave it there. Thanks so much. Thanks, Devin. Your next question comes from the line of Robert Dodd from Raymond James. Your line is open. Hi, guys and congrats on the quarter and if it hadn't been to that $1,800,000 I think you would have earned the dividend this quarter, not just in the second half. Just on the portfolio mix, Craig, you gave some comments. To obviously, you get focused on first things that you're willing to add more secondly. That goes all the way back to the IPA. You've always said that with some other things. So how What kind of mix what could firstly go down to, I guess, I'm saying, would you be happy at 80 the or would you be willing to go a little bit lower than that if you have the 2nd lien to Good borrowers and more of the fund type structures. I mean, any color on what you kind of Not quite target mix, but comfort mix would be 1st month versus the other big categories. Sure. So We are running in the high 70s now close to 80%. We would be look, we make decisions one deal at a time. As you I appreciate your Reminding folks, but we've said for a while now that we like second liens and we like doing them, but we just have a very high credit bar. Our second lien exposure is around 17%. I'd be very comfortable taking that number into the 20s to mid-20s, I mean even high-20s in a certain kind of deal environment. We get shown a lot of second lien opportunities, we just say no to almost all of them. And the other piece which I touched on in my comments, you didn't ask about it, but I'll bring it up is, I do think the other part of our portfolio, the equity preferred investments in Sudeo Lake, investments in Wingspire that all approximates give or take 5 I think that that number could go up as well. We were it's very there's only a handful investments that comprise that, to on primarily our investments in Sebago and Wingspire, a couple of equity investment, 1 PLI which we took over. We are seeing some interesting structured capital opportunities. We did one this quarter for a company called Mavis, which was previously in our portfolio where we did a structured preferred. And so that 5% I think could grow over time to high single digits, maybe even approaching 10%. So just to come back to it, if we took our second lien over time to the low 20s and took the others to the high single digits. That would get the first lien down to something 70%, down from close to 80% today, something like that over time. We're not targeting that, but if you want a sense of where it might go, I think that might that gives you a sense. Okay. I really appreciate that. And just kind of I mean, obviously, when you do a second lien deal, to your point, your credit buyers, you're typically not doing a second lien deal for the $50,000,000 EBITDA, right? To the I mean, they tend to be much bigger companies. On that side, on the equity, I mean, beyond the funds, obviously, which to the where you're willing to do that, is that same kind of thing characteristic that you'd only be willing to do that on larger businesses or any color on that one? Yes. I think that's right. I think even larger our borrowers obviously even that much higher for anything that structured capital that might be again, I don't want to overstate to the We're doing these like 1 a quarter. It's not I don't want to make it seem like we're doing lots of these. What's happened is Valuations are quite high right now. Financial sponsors are having to pay very significant prices to buy companies. And leverage is not going up that much. That gap is being filled by more and more equity from the financial sponsors. And so we're seeing we're getting approached For companies we like, maybe we're doing a second lien, the sponsors are writing an even bigger equity check beneath us and they're saying, can you structure something Where we think we're getting downside protection through a preferred structure and we're getting low to mid teens type rates of return. Those are interesting, but our bar is extraordinarily high on those even beyond the 2nd lien for obvious reasons. You're a bit deeper. We won't do you won't see us do a lot to the As you know and you touched on our 2nd lien bar, if our average EBITDA across the portfolio is $100,000,000 of EBITDA, our 2nd lien are closer 200,000,000 of EBITDA. And so the bar for preferreds will be even that much higher. Got it. Thank you. Thanks, Robert. Your next question comes from the line of Mickey Schleien from Ladenburg. Your line is open. Good morning, Craig, and hello to Jonathan. Craig, I don't want to beat a dead horse, but I want to follow-up on the 2nd lien and the Unitrans question. I do appreciate that Alrock is still somewhat transitioning from its pre IPO portfolio. But I'd like to ask you how we should think about the additional credit risk you might be introducing by a higher allocation to those 2 segments. And what's the delta In spreads today for those deals versus 1st lien. Sure. Look, there's nothing new here. We've been doing unitranche since inception. We've been doing 2nd lien since inception. Our unitranche gets we Depending upon where in our disclosure it gets included as 1st lien, today it's about a third of the overall portfolio is unitranche. What we have done and maybe this What you're alluding to is, as we built the portfolio, we wanted to scale relatively quickly, but we wanted to do it safely. And so we put a the high quality but lower spread first lien paper in the book. We still have $1,000,000,000 of what I'll call true first lien at L550 the in the book. And we've been looking to cycle out of that and put it into higher spread unitranche to the on paper. Unitranche, so if I just used L550 as a dividing line, unitranche today is anywhere from 550 to 700 depending upon the credit. There has been some spread compression there. A lot of our unit tranches in our book at kind of L600 to the 25, 650, but new unit tranches are coming more with a 5 handle. 2nd liens today are coming anywhere from L the 650 to L800 depending upon the credit. But again, I don't view this as new. For those of you who followed us, when we started 5 years ago, we had 35%, 40% of the book as second lien. We've been running extremely low at 17%. So it's really, to I'd say just been ebbing at a very low level and we're talking about moderating that back up. We have stayed flat to the in the last couple of quarters, so it hasn't gone up. But the question I was asked was what would you be comfortable taking it up to and obviously we want Give folks a flavor for that. But most of our activity continues to be 1st lien, most of it continues to be unitranche. But if we find chunky second liens to do, we will happily do them for the right credits. And to follow-up on that, Craig, do you given the current market conditions, would you be comfortable with majority of the portfolio in unitranche as opposed to pure first lien? Well, again, a third of the portfolio today is unitranche. To the so yes, I'd be comfortable taking having all of our first lien to unitranche. We think unitranche is really ideal for BDC. And the reason is because you get a higher spread, but you attach a dollar 1, so there's great downside protection. But again, with a high credit bar, to the we just we find we wind up having a mix. And by the way, some of our first lien is it's a 1st lien from a credit the from a leverage standpoint, from a loan to value standpoint, but it's more we're able to get higher yield because the credit might be a trickier underwrite. And so it's more of a stretch first to the in terms of art, but we unitranche is a core to what we do. It's to the core offering for direct lending and particularly in the tech sector, we're seeing some really attractive very large unit tranches that we continue to be very active in. And Craig, my last question, just considering your deep relationships across the financial community, how actively Does Blue Owl or Owl Rock specifically sell first out pieces of the unit tranche or do you prefer to hold the entire deal on your balance sheet. We hold the whole deal. The construct that you're describing where a lender does the unitranche and sells the first out, when we started Alrock, I would say that was often the predominant the method that lenders used and sold the first out to try to boost returns. I think there's been a real change there, Mickey, that that's not often done and that most lenders in the market and certainly we typically just hold it all. And part of that is the borrowers prefer to just have one counterparty. And even though that financial engineering is being done behind the scenes, the borrowers are aware of it and don't Particularly welcome having that uncertainty introduced into the equation. So we hold it all. I mean there may be one deal in our book that's structured particular way, but almost all of them we hold it all. And I'd say that's the trend across the industry now most certainly in the middle upper middle market most lenders just hold it all rather than slice it up. I appreciate that, Craig. That's it for me. I just want to thank Alan for our relationship and all the hard work he did to put together Alrock and ORCC. Much appreciate Your next question comes from the line of Casey Alexander from Compass Point. Your line is open. The Hi, good morning. I'd like to echo Vicki's comments thanking Alan for great work and the very definitive information flow in our work in trying to cover this company and welcome Jonathan to the platform. Most of my questions have been asked and answered, but I would ask that generally in a quarter that's active in deployments And repayments such as this one. There's almost some immediate activity that also tended to slip over the quarter into the Q3. So I'm just wondering, were there any deals that pushed out into the Q3 that might give you some insight into deployment activity in the Q3? And also some view as to how repayments are shaping up in this quarter? Sure. So I mentioned this briefly in the comments, but I'm happy to underscore We have visibility on our Q3. It's going to be a very active one from an origination standpoint. I would say, again, it depends on When everything winds up closing and you just even when you have high visibility until it closes, you're not sure. But I would to the to be in line with the second quarter, possibly exceeded, but in line with it. Repayments. Also we have really nice visibility on and similar comments at least in line if not exceed. To the there are I won't get into specific deals. Yes, there were deals. There's a couple of deals that closed in the beginning the Q3, but my comments are more driven by just our near term pipeline, which we're seeing and map out on a the daily, weekly basis and what we expect to have close over the next month or so. It's quite active. Great. Thank you, Craig. Very helpful and appreciate you taking my questions. Sure. Thanks, Casey. Casey, thank you very much. Your next question comes from the line of Kenneth Lee from RBC Capital Markets. Your line is open. Hi, thanks for taking my question. Just one on the senior loan point JV. I'm wondering if you could just remind us again the potential benefits of ORCC and how you think about potential allocation toward that JV in the near term? Thanks. Well, I'm not sure. Well, I'll try to answer the question. I may be missing some nuance to it. To our JV, we've changed the name, but I'll use Sebago Lake since that's the name everybody's familiar with. It's been a wonderful partnership we had for UC Regents. They're terrific partners in it. And it's really a first lien strategy, not unitranche, all first lien, direct and syndicated first lien term loans. We've earned about a 10% ROE at that JV. And we think that growing it's a great investment for ORCC. It benefits from ORCC's sourcing capabilities. And we had a desire to grow it and think it's just a terrific return opportunity for our investors. And in discussions with UC and what they what their strategy and what they had going on, it just I think we mutually agreed and they're wonderful partners that This should be a good time for us to essentially bring in a new partner. So we were able to grow increase the size of the JV and increase ORCC's exposure to it quite significantly to $325,000,000 It's going to that's not that's our commitment. It's going to take time for us to fully invest that and get all that money working. And then as part of it, we brought in Nationwide Life Insurance, who we also know extremely well as a new partner there going forward. So, no change to how we operate the JV. It's primarily in this environment primarily doing syndicated 1st lien term loans that we have identified as a part of our underwriting process and deals we've looked at. And so we'll just be able to increase over time, our the amount of money ORCC has working to And grow that. I think in the most recent quarter, we had about $4,000,000 of dividend over time. That number, When we get all of it working, it's going to take some time. It should be at least $7,000,000 a quarter, which is, I think, terrific. Got you. Very helpful. And then just one follow-up, if I may, on the liability side. Wonder if you could elaborate on any specific further optimizations you've seen in the near term funding mix. Thanks. Well, we were definitely quite active this quarter. We feel really good about where we are from, we'll call it, the 3 legs of the stool in terms of having the corporate revolver, having the drop down SPVs as well as CLO financings and our unsecureds. So we're quite happy with the mix there. The $1,800,000 of accelerated expense that we took was because we were reducing pricing in our CLOs. So we continue to actively look at those to the and we'll be looking to find ways to optimize there. And then in addition, on the unsecured side, certainly as we mentioned, Spreads have continued to come in. Our spreads have continued to come in and we certainly will look to be active over time there. We feel really good about our liquidity position. So it's more about an optimization game right now. Got you. Great. Very helpful. Thanks again. Thank you. Your next question comes from the line of Simeon O'Shea from Wells Fargo Securities. Your line is open. The Hi, good morning. First question on the yields this quarter, Craig and team, I think you all Guided that we would see the improvement from repays and we it looks like we of course saw that. Is this about what you expected in terms of the portfolio yield or was there a little extra From higher, more juicy, repays. Any color there on what we should sort of model out? We are very pleased with the yields on new investments the Q1 and the increase in spreads the comparison spreads we were able to put on this quarter versus the Q1 was a nice pickup, Which was driven by getting some really high quality, particularly software unit tranches at really nice spreads And we did some second liens and one preferred and the mix of that, Q1 we didn't do any second lien. So the mix was to the on the spread basis, but the unitrances were higher. And I was pleased. I we're seeing others report and I think that to We're outperforming on that regard in terms of where we're adding new deals and able to increase the overall spread and the overall yield in the portfolio to the last year or the last quarter, we've talked about our desire to rotate a bit and get a little more spread in the portfolio without sacrificing credit quality. And I think where you're seeing tangible evidence that we're succeeding on that. So I'm pleased with that. In terms of the outlook, that will be a little more challenging. The The market is competitive and there is some spread pressure, and we're seeing that and I touched on that a couple of questions ago, but I'll the I'll sort of repeat it here, given how strong all the credit markets are, the public markets, private markets, capital raising private markets, there is spread pressure. And so we're seeing that and I don't I think it'll be more challenging in the next quarter to also increase and maybe We'll see a reduction in spread for new deal activity. We just have to see how it all lands. Obviously, any one quarter doesn't move the needle for the overall portfolio. But I would say our Q2 was an unusually strong one, just the we were able to sign up and pick our spots and probably a little more pressure across the industry now in the Q3. Very well. That's helpful. And can you talk on these, I guess, let's call them mega unis or something you're involved in the pipeline that's in front of the market or at the market. Can you talk about the nature of these deals. I know you often go into the advantages of private credit to the with the certainty in the privacy and so forth, but is there any sort of pocket of the where these are coming from. Are they middle market companies graduating and just sticking with the private credit solution because that's what they know and like or is it syndicated names kind of dipping down for the advantages the of private execution. Is there any sort of clear area where we're seeing this pipeline come from? Sure. I think that the single biggest driver is the continued success and growth the of software and software's views throughout all the economy and all the different companies that have been formed in the last 5 to 10 years to help companies, governments, the people, schools, run their lives, run their businesses. The modern life runs on software and these companies have there's there are many really terrific businesses that have been developed to serve that need. And these companies have grown rapidly as All those constituencies have adopted software more and more to run their activities. And Those companies can be controlled by venture capital firms, private equity firms, but there are also a number of them that are public. And so what we're seeing, one of the drivers for unitranches have been several very large take privates of companies in the software space by the financial sponsors. And so they're coming from just the growth and need for those companies And the desire for financial sponsors to own them. It's the most active area for financial sponsors to invest in and There are firms that spend all their time in the software space, but I would say most private equity firms at this point will be spending some of their time. And these businesses take real skill to underwrite. You need industry expertise to understand the business models. They're not simple and straightforward. We've invested heavily in our team and our team's expertise we think is really best in the industry. And so the we are finding ourselves in a really great competitive position and valuations are very high and I think the sponsors like the ease of use of using Unitrons to help finance that deal. The apparatus of doing a syndicated deal, It's cumbersome. It doesn't it takes time. The constituencies in that space don't always understand software in the same manner. And to the loan to value on these software loans is often actually quite modest. And I say that, 1, because they're good highlights of attractive loans, to Frankly, ease of use and execution and simplicity and knowing who your lender is and having certainty Are really important and given it's actually a modest amount of the overall capital structure, the fact that it costs more, which it does the Potentially versus syndicated deal doesn't necessarily move the needle for the sponsor either and they're growing rapidly and so they just want to get stuff done quickly with the lenders they trust. And I think that the transformational thing that's happened in the last handful of years and we've been a part of this and we're not the only one is the much bigger pools of capital now are available where you can do a $1,000,000,000 $2,000,000,000 $3,000,000,000 direct lending deal and you can do it with a very small group of lenders that you know well and trust and move quickly. And so with that big pool of capital, it's creating to even more desire for sponsors to use them for their buyouts. And so I think this trend is accelerating and we're really well positioned for it. The Great. Thank you, Craig, and congratulations, Mr. Lam, for on the new appointment. Sid. There are no further questions at this time. Now I'll turn it back over to Mr. Craig Packer. Great. Well, in closing, I'm going to add my own thank you to Alan. It's He's not going very far. He's still going to be obviously working very closely with us. But, Alan's team has been an incredible partner to me and to our whole team and, to Really deserve a lot of credit for everything that we've built at LRCC and in Alrock and we will still be interacting with them all the time, but really his to the on what we felt will be felt for many years to come. So thanks to Alan. Thanks to all of you for joining and we look forward to talking to you soon. This does conclude today's conference call. Thank you for your participation. You may now disconnect.