Blue Owl Capital Corporation (OBDC) Q3 2026 Earnings Call Transcript

Operator: Good morning, everyone, and welcome to the Blue Owl Capital Corporation's third quarter 2026 earnings call. As a reminder, this call is being recorded. At this time, I'd like to turn the call over to Mike Mosticchio, Head of BDC Investor Relations. Mike, please go ahead.

Mike Mosticchio: Thank you, operator, and welcome to Blue Owl Capital Corporation's third quarter 2026 earnings conference call. Joining me today are Craig Packer, Chief Executive Officer, Logan Nicholson, President, and Jonathan Lamm, Chief Financial Officer. I'd like to remind listeners that remarks made during today's call may contain forward-looking statements, which are not guarantees of future performance or results and involve a number of risks and uncertainties that are outside of 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 OBDC's filings with the SEC. The company assumes no obligation to update any forward-looking statements. We'd also like to remind everyone that we will refer to non-GAAP measures on the call, which are reconciled to GAAP figures in our earnings presentation available on the Events and Presentation section of our website. Certain information discussed on this call and in the company's earnings materials, including information related to portfolio companies, was derived from third-party sources and has not been independently verified. The company makes no such representations or warranties with respect to this information. Yesterday, OBDC issued its financial results for the third quarter ended September 30, 2026, reporting adjusted net investment income of $0.33 per share and a net asset value of $14.32 per share. All materials referenced during today's call, including the earnings press release, earnings presentation, and 10-Q, are available on the News and Events section of OBDC's website. With that, I'll turn the call over to Craig.

Craig Packer: Thanks, Mike, and good morning, everyone. Thank you for joining us today. We are very pleased with this quarter's results. Earnings more than covered the dividend, NAV is up, our borrowers continue to perform well, and our balance sheet remains healthy. In the third quarter, OBDC generated adjusted net investment income of $0.33 per share that comfortably covered our base dividend of $0.31 per share and resulted in an annualized ROE of approximately 9.2%. Based on these results, we also declared a supplemental dividend of $0.01 per share, consistent with our framework that allows shareholders to benefit from earnings in excess of our base dividend. Net asset value per share was up modestly at the end of the quarter to $14.32 from $14.26. The improvement in market sentiment drove tighter spreads and higher portfolio marks, while credit quality remained strong, including across our software borrowers. Importantly, there were no new issuers added to non-accrual this quarter. Together, our earnings and growth in NAV resulted in a net income ROE of 10.3%. We continued to repurchase shares during the quarter, buying back $35 million in stock, which was accretive to NAV per share and bringing our total repurchases over the past year to $254 million. We remain focused on deploying capital where we see the greatest opportunity to drive value for our shareholders, thoughtfully balancing the accretive impact of share repurchases with attractive new investment opportunities. Turning to the market environment, the stabilization in direct lending that we described last quarter is starting to be reflected in valuations, NAV stability, and earnings. While deal activity remained relatively light during the quarter, we continued to benefit from improved market economics as deployment modestly increased. Weighted average spreads on new investment commitments increased from last quarter, while our scaled portfolio continued to generate attractive opportunities through incumbent borrowers. Looking at the rate environment, the Fed raised rates by 25 basis points in September, its first increase since 2023, and the forward curve now points to a higher-for-longer environment. Given the predominantly floating rate nature of our portfolio, these higher rates should be a net benefit to our earnings as these loans reset. For our borrowers, we believe the impact of higher debt service costs is very manageable. Rates were more than 100 basis points higher just two years ago, and the portfolio at that time performed well throughout the period. Importantly, we continue to see strong credit quality and portfolio performance even through the volatility this year. We diligently monitor for early signs of credit stress, which remain very limited across the portfolio. In fact, several of our existing watch list names we have been following most closely showed modest improvement in operating performance, which is encouraging at a time when we are seeing greater dispersion in credit performance across the broader industry. That performance reinforces our conviction that disciplined underwriting, thoughtful portfolio construction, and the depth of our team remain critical differentiators, particularly in an uncertain credit environment. Taken together, our earnings outlook has reached an inflection point. Wider spreads are beginning to flow into the portfolio, while higher base rates should provide an additional tailwind over the coming quarters. Now I will turn the call over to Logan to provide more details on our investment activity and portfolio performance.

Logan Nicholson: Thanks, Craig. Starting with investment activity, regular way sponsored deal flow continues to remain below historical levels, although activity has picked up since last quarter, and we continue to find attractive opportunities across our existing portfolio. New investment commitments came in at over $890 million, with fundings of over $700 million. Over 50% of fundings were to incumbent borrowers, with origination activity spread across 14 new names. As Craig mentioned earlier, we began to see the improved economics that we've discussed in recent quarters flow through our funded activity, with the weighted average spread of our new floating rate investments increasing to 5.2%, up from 4.8% since the fourth quarter of last year. Repayments totaled approximately $634 million during the quarter. This volume was in line with historical levels, although down compared to recent years, where opportunistic refinancings drove repayment activity higher. Even at this pace, approximately 15% of our portfolio has turned over year-to-date, providing additional capacity to redeploy capital into new investments at attractive spreads. Taken together, repayments mostly offset new fundings this quarter, resulting in net leverage of 1.13 times, roughly in line with last quarter. Importantly, we don't need a significant pickup in broader deal activity to capture today's more attractive spreads. Our existing portfolio can create opportunities to deploy additional capital through refinancings, add-ons, and new transactions with companies where we have deep existing relationships. Our investment in Big Brand Tire & Service this quarter provides a good example of this incumbency benefit. We know the auto services sector well, including through our prior investment in Mavis Tire, which we discussed last quarter. We first invested in Big Brand last year, and during the third quarter of this year, we provided additional financing to support an add-on acquisition for the business, creating one of the largest auto service platforms in the country. As part of the transaction, both our new and existing loans were priced at S+575, up from S+450 previously, reflecting broader widening in market spreads and the benefit of having scale, incumbency, and deep market expertise. Big Brand continues to grow and perform well, benefiting both our debt investment and equity co-investment, which is now marked well above our cost. Turning to the portfolio, our borrowers continue to perform well, with revenue and EBITDA growing again in the mid-single digits year-over-year. We also saw a greater percentage of companies that met or exceeded our earnings expectations this quarter, reinforcing the strength we see across the portfolio. We continue to keep an eye on broader macro trends, including higher rates, elevated energy prices, and areas of the economy where consumer trends are mixed, and these pressures have had minimal impact across our portfolio to date. As a reminder, we have limited exposure to these more cyclical areas, such as certain consumer-facing industries or building products. Our resilience reflects our focus on larger companies in defensive industries, which tend to benefit from more stable demand and diversified revenue streams. OBDC remains highly diversified across 233 companies in 29 industries, with an average position size of approximately 40 basis points and 79% of the portfolio at fair value invested in senior secured loans. Credit metrics were stable this quarter, with non-accruals constant at 0.8% at fair value. There were no new issuers added to non-accrual this quarter, only one additional tranche of an existing name already on non-accrual. It's also worth mentioning that subsequent to quarter end, we resolved several of our larger non-accrual positions, including National Dentex, QC Supply, and Loparex. We had been actively managing these situations for some time and are pleased to have reached their resolutions. Importantly, our marks as of quarter end already reflected our visibility on these outcomes, so we expect limited, if any, future impact to NAV. Borrower interest coverage is in line with last quarter at approximately 2x, while revolver utilization and amendment activity remain steady. Portfolio company net leverage averaged 5.9x, and LTVs remain stable at approximately 47%, reflecting significant equity cushions beneath our loans. Our watch list remained in line with historical averages, with three to five rated names at approximately 9.4% of the portfolio at fair value. We believe our borrowers remain well-positioned for higher rates. Even with another 100 basis point increase and holding all else equal, interest coverage would remain around 1.8x, above the 1.6x trough level our portfolio managed through when SOFR was over 5% in 2023 and 2024. PIK income declined to 9.9% of total investment income this quarter, down from 10.7% last quarter, and from peak levels of more than 13% two years ago. As a reminder, the vast majority of our PIK was structured at inception rather than added through amendments related to credit stress, and these investments continue to perform as expected. Our software exposure represents approximately 18% of the portfolio and continues to be one of our strongest performing areas, with modestly higher marks this quarter. As a reminder, our investments remain primarily first lien, senior secured loans to large, mission-critical enterprise software companies, with a weighted average EBITDA of over $300 million. Looking ahead, we remain encouraged by the resilience of our portfolio and the progress we're making on the credits we're actively managing. Our modest leverage provides flexibility to capitalize on increasingly favorable market conditions for lenders. Now, I'll turn it over to Jonathan to review our financial results.

Jonathan Lamm: Thank you, Logan. In the third quarter, OBDC earned adjusted NII of $0.33 per share, exceeding the base dividend of $0.31 per share. Earnings benefited primarily from elevated dividend income, while non-recurring fee income was more modest than last quarter and slightly below long-term averages. The board declared a fourth quarter base dividend of $0.31 per share, which will be paid on January 15th to shareholders of record as of December 31st. And a supplemental dividend of $0.01 per share, which will be paid on December 15th to shareholders of record as of November 30th. Looking ahead, higher base rates and the wider spreads on new commitments should provide an additional tailwind in the coming quarters. To put this potential impact into perspective, with 95% of our debt investments floating rate and all else equal, a 100 basis point rise in base rates would increase quarterly earnings by approximately $0.02. Given the lag in how our loans reset, we expect the benefit from the September rate hike to begin flowing through in the fourth quarter. With earnings covering the dividend, additional support from higher base rates, and spillover income, we believe the dividend remains well-supported. Moving to the balance sheet. Third quarter NAV per share was $14.32, up from $14.26 last quarter. The increase was driven by improved portfolio marks and accretive share repurchases. In the third quarter, we repurchased $35 million of stock, which was accretive to NAV per share by $0.02. We ended the quarter with approximately $195 million of remaining capacity under our current $300 million repurchase authorization. Net leverage was 1.13x at quarter end, within our target range of 0.9x to 1.25x, driven by repayments mostly in line with new fundings, as well as allocating capital to repurchasing shares. Looking at our capital structure, in September, we closed a $292 million CLO at an attractive spread of SOFR plus 160 basis points, marginally reducing our cost of secured financing while maintaining a diverse funding mix. Total liquidity, including cash and undrawn capacity on our credit facilities, remains robust at approximately $3.6 billion, comfortably exceeding our unfunded commitments. Our diversified funding sources and staggered maturity schedule position us well to deploy prudently as opportunities arise. Overall, we remain pleased with the strength of our balance sheet and the financial flexibility it affords us to take advantage of the current market environment. Now, I will turn it over to Craig for some closing remarks.

Craig Packer: Thanks, Jonathan. A year ago, sentiment toward private credit shifted meaningfully as investors became increasingly concerned that credit issues would begin to emerge across the asset class. That change in sentiment created significant volatility for BDC stock prices, including OBDC. One year later, we believe OBDC's performance has demonstrated the quality and durability of the portfolio. Our borrowers continue to perform well with healthy earnings growth, while credit quality remains strong with non-accruals at just 0.8% of the portfolio at fair value. Taking a step back, that resilience has been a hallmark of OBDC over a much longer period. NAV per share has remained stable over the past decade, while our annualized loss rate has averaged just 33 basis points, below broader industry rates. As another validation of our NAV and valuations, I think it is helpful to provide an update on OBDC II, particularly given the high overlap with OBDC. As you may recall, we have been pursuing a path to return capital to OBDC II shareholders, which has resulted in significant realization activity this year. Since the beginning of the year, we have now exited approximately $1 billion of investments, representing more than 60% of OBDC II's portfolio across all or a portion of approximately 130 investments, reducing the portfolio from approximately $1.6 billion to $600 million. That includes over $450 million of additional repayments following the asset sale we completed earlier this year. Importantly, every single exit has been at or above our marks. Because each of these investments is also held by OBDC, we believe this provides clear validation of the quality and valuation of these positions in OBDC's portfolio. As we look ahead, we believe OBDC is well-positioned for the coming quarters. Investments originated at wider spreads are now funding and beginning to contribute to earnings. That benefit should build over time as we deploy additional capital, while higher base rates should provide another tailwind as our existing loans reset. At the same time, credit quality remains strong, and with leverage within our target range and ample liquidity, we have the flexibility to deploy into attractive opportunities while remaining selective. As we discussed at our recent analyst day, that flexibility is supported by a deep, experienced team and a disciplined underwriting and portfolio management process that has been refined over many years. We believe that combination of portfolio quality, improving earnings power, and a strong balance sheet positions us well to continue driving long-term value for shareholders. Thank you for your time today. We will now open the line for questions.

Operator: Thank you. We will now be conducting a question-and-answer session. If you would like to be placed into question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. We ask you please ask one question and one follow-up, then return to the queue. Our first question today is coming from Chris Muller from Citizens Capital Markets. Your line is now live.

Chris Muller: Hey, guys. Thanks for taking the question, and congrats on a nice quarter here. I guess yields, ROEs, spreads, NAV all inflected higher in the quarter. Is it fair to assume that, at least on the earnings side, we are at or near a trough for earnings, especially with the September rate hike not fully reflected in third quarter results?

Craig Packer: Hey, Chris. Look, I think that we tried to highlight in our prepared comments that we feel very good about the outlook. As you said, rates higher, spreads higher, credit quality stable. I think your characterization is a good one. We expect things to continue to improve from here.

Chris Muller: Got it. The commentary on OBDC II is very helpful, especially with some price discovery out there. I guess the question is, how can you guys kind of close that gap between the underlying valuations and the public stock price? Is it really just putting that data out there so investors can understand it, or is there anything else you guys can do from your side?

Craig Packer: So, it is a great question, and it is one we have spent a lot of time thinking about, and maybe beyond the investing, it is certainly right up there in terms of our focus. It is our hope by sharing detailed updates on how OBDC II is performing, that that will get at the core of what we hear concerns from investors on, which is the quality of the NAV and the quality of the marks. I do not think that is specific to OBDC. I think that has been a general concern around private credit over the last year or so. I think our valuation process is very good. I won't repeat how we do it. We use a third party. We think here we have at OBDC II a fund that was $1.6 billion less than a year ago. We have now exited or gotten repaid on $1 billion of the $1.6 billion, and every position has come out at our marks. We think by highlighting that to investors on this call and in individual conversations, given all those names are in OBDC, that should give investors significantly improved confidence in the quality of the marks. Obviously, we are trying to do all else we can to communicate the positive trend on earnings, the good funding position, et cetera. I think the valuation point has been one that has been concerning to investors, and we think there is no better demonstration than sales and repayments at book value. We did the initial asset sale, and that was $600 million. There were some that said, "Well, it is not enough." Now we have done another $450 million, and in very short order. All of that capital is going to return to OBDC II investors at book value. We are going to continue to work very closely with OBDC's board and do all we can to close this discount. I think that it is understandable this year, given all the scrutiny, the concern. As we and some of the other funds continue to perform well, we hope that those discounts will narrow.

Chris Muller: Got it. Appreciate you guys taking the questions this morning, and congrats again on another really good quarter.

Craig Packer: Thank you.

Operator: Thank you. Our next question is coming from Jason Stewart from Compass Point. Your line is now live.

Dylan Ritter: Hey, good morning, and thanks for taking my question. Dylan Ritter here for Jason. It looks like there's over $1 billion of unsecured notes coming due over the next 12 months. How are you thinking about refinancing them, and what increase in interest costs should we assume versus what's rolling off, given where rates are today and headed?

Jonathan Lamm: Yeah, no, thanks for the question. We've done a fair amount in terms of unsecured over the course of this year, with obviously some positions, some notes maturing. We feel like we're in a very good position to be opportunistic around certainly the near-term refinancings. We're north of 52% in unsecured, so well north of where we would need to be. We'll take a look at the unsecured markets and certainly look at secured, and secured is generally going to be cheaper, and we'll make the decisions then. The most important point is that we have way more financing now than we possibly need. We've got over $3.6 billion of cash and available liquidity relative to much lower number of unfunded commitments. In terms of some of the cost questions that you've highlighted, there are some notes that are coming off this year, and we've talked about that in prior scripts and calls, where we had fixed rate notes going back to the zero rate environment. You will see a little bit of a tick up there, but we've been talking about all the other things that we've done to lower financing costs, in particular on the spread side in secured, in order to offset that.

Dylan Ritter: Great. Thanks. As a follow-up, how do you feel about where leverage stands today, especially now as you continue to repurchase stock, and how are you guys balancing that with growing the portfolio?

Craig Packer: I think we are in a great spot. I think we like where we are from a leverage standpoint. I think it gives us flexibility if we see an especially good origination quarter to take advantage of that. I think that we are properly using leverage to make sure we are generating returns. So I think it is ideal and gives us, if we were a little higher, a little lower, I think that would be fine as well. But I think I like where we are.

Dylan Ritter: Got it. Thanks.

Operator: Thank you. Our next question is coming from Robert Dodd from Raymond James. Your line is now live.

Robert Dodd: Hi, guys. First, thanks for the detail on OBDC II. Some of that is in the eight-Ks, obviously, but appreciate that and the color. Moving on to the outlook, less so, I am not going to ask you to predict M&A because we have all got our fingers burnt on that. More the correlation, obviously, between rising rates, good for earnings. We have seen a rising rate cycle before that was not, frankly, that bad for credit, I do not think. What is your view on how the portfolio companies themselves, some of them are new since the rate cycle, some of them are pre-rate cycle, but they have been through a rate cycle now. How do you think the portfolio companies are set to handle a rising rate cycle? I mean, it looks like it might be 100 basis points this time, not 500 again, but I am just trying to get your view on how that shakes out on a credit quality when rates are already going up, but if they peak in the mid to high fours.

Logan Nicholson: Sure. Thanks, Robert, for the question. It is Logan. Look, we think they are set up really nicely. A couple of key stats just to reiterate from earlier. We think at 2x interest coverage today, even with that full 100 basis points, we would only drop about halfway back to the trough interest coverage level. So, companies are set up really well today. I would also point out that going back to the last rate cycle, we were coming off a period of time post-COVID where there were a lot of other inflationary pressures that were fairly acute, like labor cost inflation, commodity price inflation. There was a lot more going on under the surface in those portfolio companies, and they all managed it really well. We did not see a material uptick in defaults there. I feel like with the strength in the portfolio today and where it sits today from a cash flow coverage standpoint, we are set up quite nicely. As you know, the forward curve currently shows SOFR topping out around 4.6%, which is significantly inside of where it topped out last cycle at around five and a quarter.

Robert Dodd: Got it. Thank you. On kind of like, I have asked about it, the strategic opportunities in the portfolio, and you have added several different types of cross-asset opportunities, et cetera. Is there any update on those or the same kind of target range? I mean, that is obviously those more specialized areas where you have expertise, maybe more defensible than some of the pure, I do not want to say commodity direct lending, but there is an element to that. So any update on your view on that mix going forward?

Logan Nicholson: Yeah, I think we continue to like our eight different JV and specialty equity investments that we have across the portfolio. We continue to deploy into them and like the returns. The returns across the group from an ROE perspective have been in the low double digits consistently. There is no change to that today. So we would like to continue to grow it. Today, if you look at all eight together, they represent just over 13% of OBDC. I think adding a percentage point or two would be something we would continue to look to do in any given year. So, slow, steady, and disciplined deployment to grow that book is our goal.

Robert Dodd: Got it. Thank you.

Operator: Thank you. As a reminder, that is star one to be placed into the question queue. Our next question is coming from Arren from Truist Securities. Your line is now live.

Arren Cyganovich: Hey, good morning. We have been hearing that the upper middle market has been generally more attractive than it had been, assuming from the lower, slower flows going into non-traded BDCs. Are you still seeing kind of the same level of spread widening, documentation improvements, leverage levels, or is that starting to get competed away as folks are starting to really look into the upper middle market again?

Logan Nicholson: I think it is an attractive environment to invest in upper middle market direct lending. Spreads are wider. I think deals generally are coming at reasonable leverage with good documentation, as they always do and as they have for years. As you sort of pointed out, as the industry has had outflows out of the non-traded funds, that creates better supply-demand characteristics for the public BDCs that are not subject to those outflows. I think that creates a better environment. I think that the M&A environment is modest, and I think a pickup in M&A, sponsor M&A would help, but there is enough activity for us to continue to deploy and take advantage of these wider spreads, and we highlighted that in the script. That could be through add-ons or refis. We can do it from our existing portfolio companies. I feel really good about upper middle market lending and where we can deploy capital in all the components, economic, structural, other types of credits that we can finance. I think this is a good environment.

Arren Cyganovich: Great. On the dividend income side, you had a nice pop this quarter, and it was attributed to a strategic equity investment. Can you highlight what that was and is that something that is recurring or is that more of a just kind of a one-time dividend that was paid to OBDC?

Logan Nicholson: Sure. The bulk of our dividend income is recurring. We did have a specific transaction for Loparex, where the company went about a share buyback transaction as part of that, accelerated a little bit of income. There was a slight bump of one to two cents in our income across the dividends this quarter that was transactional, but the vast majority of it is recurring in nature. There is a transaction-specific bump this quarter. We've had, as you've heard us talk about with LSI earlier this year, in any given quarter, there's the potential for a transaction that's non-recurring to bump those dividends up from time to time, but Loparex was the specific one this quarter that contributed a couple of pennies.

Arren Cyganovich: Great. Thank you.

Operator: Thank you. Next question is coming from Paul Johnson from KBW. Your line is now live.

Paul Johnson: Hey, good morning. Thanks for taking my questions. I was wondering, just in terms of the specialty investments, what sort of progress, I guess, there's been in terms of data center investments in any of the specialty investments within OBDC?

Logan Nicholson: Sure. I'll just maybe segment this a little bit. We don't have any data center equity investments, development investments in OBDC. We have participated in small size, altogether it's just over 1% of the portfolio today. We've done a handful of equipment finance deals, either in our specialty finance business, Wingspire, or on our balance sheet at OBDC. Very small size. We have done that, we've tried to focus on equipment like power generation and GPUs with strong contractual investment-grade off-takers. We think about it as very strong contractual cash flows on the other side, and we try to think about it in terms of attractive LTVs with secured collateral and short duration. The average duration of our transaction there is around two years or less, weighted average life for our equipment finance deals. We played it selectively. It's very small size in the portfolio in the form of secured equipment finance only, not long-duration data centers. That's not particularly relevant for this fund. It's other pockets at Blue Owl.

Paul Johnson: Got it. Appreciate it. That's very helpful. I guess in terms of new deployment, you sound pretty optimistic about spreads, and appreciate the examples of some refinancing opportunities there to widen out spreads within the book. I guess, where does the emphasis fall today in terms of pricing versus the documentation? Are you in a position where you're essentially getting both better documentation and the pricing, or are you leaning a little bit harder on the spread, tightening the pricing aspect?

Logan Nicholson: Look, I don't want to sound sort of dismissive of the premise, but we don't make investments that we're not comfortable with the documentation. It has been good for 10 years. That's the nature of direct lending. We're very disciplined around that. Certainly any one deal at any one moment in time, you can get a term or two that's better, but it's just not something that we relax in any market environment. I would say in terms of our focus, it's not going to sound profound. We're in a really good spot. Our leverage is right in our sweet spot. We're overearning the dividend with the prospect that that will increase. To a certain level, we're matching deployment to repayments. We feel we've got a good opportunity each and every quarter to do that based on the existing portfolio companies and new deals. To the extent that there's a wider set of opportunities, we will make the optimal choices. We'll pick the best deals that have the best combination, but they'll tend to be, I think, more economic than documentation-driven. We also like diversification, and so it's not binary. If there's more opportunities, we'll tend to spread it around a little bit. I would say, at its core, we are most looking for just high-quality credits to add to the portfolio that come with attractive economics, and want to make sure that the capital structure is appropriate and that the documentation protects us. I think we have seen those. We saw a good amount of them in the most recent quarter, and we continue to see them in our pipeline.

Paul Johnson: Got it. Appreciate that. Maybe just in terms of the request for PIK at origination, what you've seen there, has that become less frequent? That's all for me. Thank you.

Logan Nicholson: The request for PIK at origination, it has been a little less frequent, but the market has evolved. Larger cap issuers do seek to have the PIK option as an option in the first couple of years in many of our first lien financings. I think that that option has been requested on the margin a little less, given the rate cycle that we're in is a bit lower today than it was two or three years ago, but it's still an option that's embedded. What we have seen is borrowers have just elected to use that option with less frequency. That's because it costs more. You pay a spread premium when you're using that option. I would say that it's a feature that some of the largest, highest quality borrowers continue to ask for, but we just don't see as much utilization under it today. Some of our larger PIK investments have paid off in the portfolio. The decline in PIK in the portfolio is not just from slightly lower utilization of the existing options, it's from some payoffs. This quarter, we included some disclosure in our cash flow statement that year-to-date shows our PIK cash collections. We broke that line item out, and if you look at that year-to-date, it's actually greater than our PIK accruals. We've actually been monetizing a fair amount of our PIK this year, and shows that our PIK loans are performing as we intended and paying off regularly.

Craig Packer: I just want to underscore this for those that aren't going into the detail. Our PIK this quarter, investment income percentage PIK, is down. It's down the last two quarters. It's the lowest level it's been in a year. We've gone to great pains in these calls to highlight that we are structuring our PIK intentionally, and we don't see it by itself as an indicator of stress. We also know some investors are skeptical about that. I would highlight for those that are skeptical, it's gone down two quarters in a row. So, if you believe that it's a sign of stress, then you should believe that stress is reduced. Again, that's not how we see it, but some do, and if you do, this should be welcome news. We use it opportunistically where we get compensated for it. It tends to be the most demanded when there's a robust new deal environment, which we're not in right now. We get asked for it from time to time, and we consider it based on the circumstances of the deals.

Operator: Thank you. Our next question today is coming from Erik Zwick from Lucid Capital Markets. Your line is now live.

Erik Zwick: Thank you. Good morning. Noticed the percentage of new debt commitments with floating interest rates in 3Q was 81%, so a little bit lower than we would typically see. I'm curious if you're seeing more borrowers that are negotiating for fixed rates, given an outlook for, I guess, higher rates possibly, or something else that maybe drove that decline in the quarter?

Logan Nicholson: No, we really just had one substantial origination. It was in the GPU asset-backed finance, equipment finance space that I mentioned. That was a fixed rate origination with a substantial upfront fee component as well. Really just a one-off origination this quarter. It is not something we are seeing change in our traditional corporate direct lending market in terms of fixed versus floating. The vast majority of what we are doing is still going to be floating rate, but we did have one origination in that category of fixed this quarter.

Erik Zwick: Appreciate the color there. Then last one for me, just kind of revisiting the discussion about 3Q being an inflection point on a number of kind of key metrics, but looking at it from maybe a different perspective. As a lender of money, you are obviously in the business of managing downside risk. As you sit there today, what are the biggest risks to the continued improvement, and how are you managing for them today?

Craig Packer: Look, it is going to sound pretty basic, but the biggest risk for us is always credit selection, and that is something that we have done extremely well. But that is a day in, day out focus, is picking the right credits. I think that, without repeating our strategy, I think folks are familiar, the world is uncertain. It is always uncertain. You can all have a view on where the economy is going to go and what the priorities are going to be. We are trying to pick credits that are enduring regardless of the general economic conditions. So, I think that is first and foremost. Again, we have highlighted higher rates will help. That is just math. If rates are lower, then we will not earn as much. I mean, there is not, I think, much you can do about that. It is the nature of investing in floating rate loans, which is the nature of what we do. We are, again, having the capacity to take advantage of that is a way to prepare for that, and we have it. I think the spread environment is a good one. Of course, that could reverse. Again, we cannot control that market, but I feel like it is pretty well balanced. Look, what we are going to be able to do at OBDC is regardless of what we are trying to do, regardless of the economic environment, regardless of those rate and spread environments, we are trying to deliver premium returns than we can get in the public markets and deliver very consistent dividend, ROE performance, and stable NAV growth. That is what we are trying to do, and we do that managing a very diversified portfolio, having very strong liability structures, having a very wide funnel. That is the model, and we think that model has worked well, high rates, low rates, and in between. We are going to continue doing that.

Operator: Thank you. Our next question today is coming from Derek Hewett from Bank of America. Your line is now live.

Derek Hewett: Good morning, everyone. I appreciate the additional color, or excuse me, disclosure on whether it was Blue Owl II or the revised disclosure on PIK collections. Most of my questions were already addressed, so really, I just have a housekeeping issue, and it has to do with the rise in the excise tax on a quarter-over-quarter basis. Any color there on what caused the jump, and then what are your expectations for it going forward?

Jonathan Lamm: We actually would say that on a go-forward basis, it should come down. We just filed our 2025 tax return, and the tax return, obviously, excise tax is driven off of taxable income, and there are true-ups that happen effectively nine months after you finalize your year. Through those true-ups, you should expect that number to actually trend down on the next quarter basis.

Derek Hewett: Okay, great. Thank you.

Operator: Thank you. Our next question today is coming from John Hecht from Jefferies. Your line is now live. John Hecht, perhaps your phone is on mute. Please pick up your handset. Please rejoin the queue, John. Our next question is coming from Mickey Schleien from Clear Street. Your line is now live.

Mickey Schleien: Yes, good morning, everyone. You know, a lot of good questions this morning, but I wanted to just quickly ask you about credit quality. Your category 3 investments increased a bit from 7.2% to 8.5%. Curious what is driving that increase, and are you seeing any broader credit deterioration among your otherwise performing borrowers, and are you seeing any meaningful changes in the performance? I think you talked about this, but I will just reiterate. Are you seeing any meaningful changes in the performance of your weaker credits, particularly in terms of amendments and restructurings, et cetera?

Logan Nicholson: Great. Thanks for the question, Mickey. Look, I think on the 3s to 5s rated, 3s specifically, there was a slight increase this quarter, but I would just zoom out a little bit. Over the last two years, the 3s to 5s rated category has been between 8%-10% of the portfolio, so we are sort of squarely in the middle of that range in the low 9s. If you look back three or four years, in the 2022, 2023 timeframe, that category was 10%-12% of the portfolio. So, we add things and take things off of the watch list and downgrade them to three periodically, and really as a precautionary measure when something underperforms. There wasn't any specific category or trend in the handful of businesses that we downgraded this quarter, and we had some upgrades as well. I really wouldn't say anything out of the ordinary. If you look at the earnings company by company this quarter, as we alluded to in the script, on the margin, more companies exceeded our expectation for the quarter than they did last quarter. On the margin, we felt it was a slightly stronger quarter. If you also scrutinize the 4s to 5s rated, the 4s to 5s rated is below 1% of the portfolio, and that's towards the low end of the range. Some of the movements in the buckets were in the higher category. Nothing cautionary about the quarter. In fact, on the margin, a little bit better than expectations, and we didn't really see any surprises or any large movements on the watch list in terms of markdowns, any companies hitting the wall. Material amendments were squarely in the middle of the range that we've had for the last two years in terms of amendment activity. Really, just nothing out of the ordinary in the portfolio this quarter.

Mickey Schleien: That's really helpful. Thank you for that. My follow-up is regarding share repurchases, which continued in the quarter. Happy to see that. I've been at this a long time, and I've seen share repurchase programs announced and then never executed, but you're doing it. At the same time, you've reiterated several times that economics on new deals are looking more interesting. Just curious, with the stock still trading below NAV, but these investment opportunities improving, how are you weighing the accretion from additional repurchases against deploying capital into new investments?

Jonathan Lamm: First of all, Mickey, welcome back. Great to have you back on the call after a couple of quarters. Just on the repurchase plans, I think you're spot on. We weigh it with the consideration of where is our current leverage, what do repayments look like, what does the origination pipeline look like, and then certainly, where is the stock trading? As you've seen, we've purchased a fair amount of stock back over the course of the last nine months or so, and we've continued to do that. You should expect us to continue to look at the stock as another investment opportunity alongside other attractive investment opportunities, and you should expect us to continue to look at it and look at those things really balanced side by side. The only point that I would make on the repurchase plan is that we do want it and have valued it, notwithstanding the fact that we've bought back more stock in our plans than, and really, I think any other BDC platform. We do not run a 10b5-1 plan. We run a 10b-18 plan, and so we're only open during certain windows. That does limit us to only certain periods of time purchasing stock. But during those periods, as you've seen, we've been active, and you should expect us to continue to be looking at those opportunities.

Mickey Schleien: I understand, and thank you for taking my questions this morning.

Craig Packer: Thanks, Mickey.

Operator: Thank you. Our next question is coming from John Hecht from Jefferies. Your line is now live.

John Hecht: Thanks, guys, and sorry for the mute problem before. Most of my questions have also been asked and answered. I am wondering, at this part of the rate cycle, I am thinking about the forward curve, maybe do you guys have a sense for the trajectory of repayment or prepayment rates, how sensitive portfolio companies are to higher rates with that?

Craig Packer: Look, obviously, there are several factors that go into when there are repayments. Companies, private equity firms generally don't wait until the last year or so. They want to get ahead of that. The maturity schedule is a forcing function. On average, our loans get repaid in three or four years. Exits or significant acquisitions will drive repayments. Rates will certainly be a factor, but I'd say it's not the driving factor. It tends to be more corporate finance decisions made at the company. We are, at the risk of stating the obvious, we are a floating rate lender, and so they are paying SOFR regardless of where rates are. Unless they swap it, which most don't, but some do, even if you capture a really low rate when you happen to do your financing, two years later, rates are higher, you are paying a higher rate. I don't think the rate environment itself is going to drive activity. I think M&A activity picking up will drive activity. Bottom line is, I think we made the comment in the script, 15% of the portfolio is turned over in the first part of this year. It gives you a sense, and I expect you will continue to see regular repayments, refinancings, even if rates are higher.

John Hecht: Okay. That's super helpful. Then, in the prepared remarks, you guys said the portfolio companies are showing good fundamental trends, and there was even, you have observed some upside in a portion of the portfolio relative to your internal forecasts. Can you characterize where that's coming from? I mean, is it on the revenue side? Is it on the expense side generally? Or is it more industry-specific?

Logan Nicholson: I think it is some of our watch list names. We saw a handful of our watch list names stabilize a bit, and a couple of them with some positive revenue trends. You do not want to call any single name out, but it was a positive quarter in terms of stabilization in a handful of names that were on the watch list. As I said before, no real material surprises or large markdowns or large misses that were not otherwise already expected. It was really maybe some green shoots in the watch list of some revenue turning and some inflection points in those names, and really just stability in the rest. The other 91% of the book just really continuing to be stable. No real surprises there either. As we go through portfolio reviews, we try to think about where we expect things to come, where companies have budgeted for the year, how they have guided us for the next quarter. On the margin, this was a slightly better quarter in terms of performance financially for our portfolio.

John Hecht: Great. Thanks very much.

Craig Packer: Thank you.

Operator: Thank you. Next question today is coming from Christopher Nolan from Ladenburg Thalmann. Your line is now live.

Christopher Nolan: Craig, in your comments, you mentioned deal flow is below historic levels. Can you give us an update in terms of why you think that might be the case right now?

Craig Packer: I think it is pretty broadly documented private equity activity is below historical levels. Our deal flow is in part driven by private equity activity, and there is a lot that has been written about this, but generally, I think private equity firms have had a tougher time exiting at valuations they find attractive. They are keeping companies longer. There has been significant growth in the continuation vehicle market for sponsors keeping their companies. Generally, it has been just a lower exit environment for private equity firms, resulting in a lower new deal environment. When I say new deals, I mean a brand new LBO, as opposed to a refinancing of one of our credits or an add-on to one of our portfolio companies.

Christopher Nolan: Great. With all that in mind, given the increase in software exposure and given the recovery in valuations for software, should we expect a wave of private equity exits from their software investments? For OBDC, could that portend some realized gains down the road?

Craig Packer: I mean, I think that question would be better directed to the private equity firms than us. I would say, while there has been some recovery in sentiment around software, public software stocks, and loans, and we are seeing some recovery in our marks, I think there is still some uncertainty around AI impact on software. So, I suspect we have not seen enough of a recovery that it is going to result in a significant pickup. But look, our software businesses are doing really well. Their operating performance remains strong. It is one of our best performing sectors on an operating basis, revenues and EBITDA growth. So, we feel good about the companies we have. We feel good about the loans that we have. And I am pleased with the direction. I am pleased with the markets, I think, evolving more balanced appreciation for software. I think it is probably a little bit longer to where that results in exits, but there will be a few.

Christopher Nolan: Great. Thank you. Nice quarter, and I applaud the share repurchases.

Craig Packer: Thank you.

Operator: Thank you. We have reached the end of our question and answer session. I would like to turn the floor back over for any further closing comments.

Craig Packer: All right. Thanks, everyone, for joining. We are coming up on time. We really felt great about the quarter and think we delivered on all fronts, and hopefully the comments today gave you a sense of our confidence and enthusiasm for the future. We are always reachable for follow-up questions from anyone. Just reach out. We would be pleased to hear from you. And with that, thank you.

Operator: 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.