Blackstone Secured Lending Fund (NYSE:BXSL) Q3 2024 Earnings Call Transcript

Blackstone Secured Lending Fund (NYSE:BXSL) Q3 2024 Earnings Call Transcript November 12, 2024

Operator: Good day, and welcome to the Blackstone Secured Lending Third Quarter 2024 Investor Call. Today’s conference is being recorded. [Operator Instructions]. At this time, all participants are in a listen-only mode. [Operator Instructions] At this time, I’d like to turn the conference over to Stacy Wang, Head of Stakeholder Relations. Please go ahead.

Stacy Wang: Thank you, Katie. Good morning, and welcome to Blackstone Secured Lending Fund third quarter conference call. Joining me today are Brad Marshall, Co-Chief Executive Officer; Jonathan Bock, Co-Chief Executive Officer; Carlos Whitaker, President; and Teddy Desloge, Chief Financial Officer; and other members of the management team. Earlier this morning, we issued a press release and slide presentation of our results and filed our 10-Q, both of which are available on the Shareholders section of our website www.bxsl.com. We will be referring to that presentation throughout today’s call. I’d like to remind you that today’s call may include forward-looking statements, which are uncertain and outside of the firm’s control and may differ materially from actual results.

We do not undertake any duty to update these statements. For some of the risks that could affect results, please see the Risk Factors section of our most recent annual report on Form 10-K. This audio cast is copyright material of Blackstone and may not be duplicated with outcome set. With that, I’ll turn the call over to Brad Marshall.

Brad Marshall: Thank you, Stacy, and good morning, everyone. Thanks for joining our call this morning. Before we dive into details with Jon, Carlos and Teddy, I’d like to begin with some high-level thoughts related to our third quarter results. BXSL reported another strong quarter of results with active deployment, growth in net investment income, increased net asset value and continued solid credit performance. These strong results quarter-over-quarter reflect the significant power and the scale of the Blackstone platform, one of the many differentiating factors we have in private credit space. In addition to being the largest third-party private credit business, Blackstone is the world’s largest private equity platform, the world’s largest owner of commercial real estate and the largest discretionary allocator to head fund.

The interconnectivity we have as a firm has allowed us to grow our credit platform into a largest business unit of Blackstone, further helping us make disciplined and timely investment decisions, which ultimately benefit our shareholders. Let’s turn to our results. Our NII of $0.91 per share represents a 13.4% annualized return on equity and is up from $0.89 per share in the prior quarter. Further, net asset value per share increased by $0.08 to $27.27 and $27.19 per share last quarter. Our dividend of $0.77 per share is well covered at 118% and represents an 11.3% annualized dividend yield, one of the highest among our traded BDC peers with as much of their portfolio invested in first lien senior secured assets, with BXSL at 98.7%. Return drivers also remained strong.

Q&A Session

As of quarter end, BXSL has an 11.2% weighted average yield on performing debt investments with 0.2% of investments on nonaccrual at cost. The third quarter also marked another first for both the BDC industry and BXSL. In September, Moody’s upgraded the credit ratings for both BXSL and our nontraded BDC from Baa3 to Baa2, making Blackstone the only manager with two BDCs with that distinction. These ratings, along with our investing discipline may help us to further drive down the lower cost of capital and focus on investing in what we believe are higher-quality assets in BXSL. We continue to ramp up our origination for both committed and funded investments. We ended the quarter with $1.1 billion in new commitments and $956 million in fundings, marking our fourth consecutive quarter of over $1 billion in commitments and our highest quarter of fundings since 2021.

Last quarter, we discussed our broad coverage model and the prospect for increased deal flow as short-term rates were projected to fall. We have seen a pickup in BXSI’s investment pipeline as well. Since Q1 of last year, we have seen an over 2x increase in the number of deals in our BXCI pipeline. Further, BXCI was sole or lead lender in over 70% of our deals this quarter, putting us in a position to control deal structures and documentation. BXCI scale allows us to be relevant for the full range of midsized two larger businesses that are looking to grow. Looking at the broad macro environment, we have continued optimism for soft landing. The other week, we saw the lowest level of initial jobless claims since May, and repeated jobless claims also appear to be leveling off.

Q3 GDP growth came in at 2.8% annualized with what we view as current strong growth and at least a pause in the labor market weakening, we believe there is momentum to carry the current economic expansion forward until the support from Fed rate cuts has felt throughout the market. For private credit, we believe this means that 2025 may look a lot like 2021 from a deal activity standpoint. Economic growth is sufficient, private equity dry powder is high, market clearing prices moved higher. And as such, we expect a pickup in the M&A activity, which should be supportive for both deployment and repayments, which we believe to be positive for our investors. With that, I will pass over to my colleague, Jonathan.

Jonathan Bock: Thank you, Brad, and let’s turn to Slide 6. We ended the quarter with $12 billion of investments at fair value, over a 6% increase from the $11.3 billion in Q2, while adding 26 new borrowers to our portfolio now totaling 252 companies. Ending leverage and average leverage were both relatively flat compared to the quarter prior at 1.12x and that’s in the middle of our target range of 1x to 1.25x. We maintained our strong liquidity position at $1.1 billion, comprised of cash and available borrowing capacity across our revolving credit facilities, including ABLs to lean into that expanded pipeline. Our weighted average yield on performing debt investments at fair value was 11.2% this quarter compared to 11.6% last quarter.

And the yield on new debt investment fundings and assets sold and repaid during the quarter averaged 10.5% and 11%, respectively. Now let’s take a look at the portfolio and jump to Slide 7. Approximately 99% of BXSL investments are in first lien senior secured loans and 99% of those loans are the companies owned by financial sponsors, who generally have significant equity value in these capital structures demonstrated by an average loan-to-value of 46.5%. Our portfolio also has what we believe is strong LTM EBITDA base averaging at roughly $194 million, a 5% increase from last year. This is 2x larger than that of companies in the Lincoln International private market database. And we continued to see strength and performance from larger companies, the bedrock of our portfolio relative to smaller EBITDA counterparts in terms of higher growth and lower defaults.

BXSL’s portfolio companies have seen growth rates in line or higher with the broader private credit market as measured by the Lincoln database and over 15% more profitability on an LTM EBITDA margin basis. Now when speaking to portfolio performance, it’s not only strength that matters, but consistency. Our fund’s performance and portfolio company selection both speak volumes to the consistency of our investment process and the talent of our people. Most importantly, we believe we’ve demonstrated a commitment to the foundation we laid nearly six years ago with the launch of BXSL. Our relentless focus on first lien senior secured debt in lower default rate industries is what we view as a defensive posture for investors. This is further evidenced by our low nonaccrual rate of 0.2% at cost compared to that of our traded BDC peers average of 2.8% from last quarter.

Now we continue to emphasize the importance of interest coverage. The LTM EBITDA coverage based on our average LTM EBITDA for BXSL portfolio companies over the last 12 months was 1.7x in the third quarter, which again compares favorably to the Lincoln database for the broader private credit market at 1.5x average coverage in Q3. Now looking at the share of the private portfolio below 1x coverage, excluding recurring revenue loans, BXSL is at 3% of fair value versus the Lincoln private credit market being nearly 5x greater at 15%. Now looking now at how we continue to grow the portfolio, Slide 8 focuses on our industry exposure. As I mentioned earlier, in the third quarter, the number of portfolio companies in BXCL increased at 252 while maintaining focus on investment discipline and defensive positioning.

And 99% of the new private debt investments during the quarter were first lien senior secured, with an average LTV of approximately 41% on those new portfolio companies, meaning there’s a significant amount of junior capital beneath our loans. And I’ll conclude with some points on our documents and recent amendment activity. As a reminder, when we negotiate our credit agreements, especially as a leading lender, we place significant focus on control and important document protections. And this is in stark contrast to the syndicated market index where most loans lack these kind of lender protections. And especially now when recovery rates in liquid loans over the past 12 months have been depressed relative to their long-term averages, we remain highly focused on including these lender protections in our documents.

Now amendment activity was down 25% quarter-over-quarter by count with 48 of BXSL private borrowers amending documents in the third quarter. Now 90% of these amendments were associated with add-ons, M&A, DDTL extensions and immaterial technical matters or changes to terms. And the 10% of amendments representing less than 2% of BXSL portfolio at fair market value. They were associated with restructurings that involve deleveraging our position or new equity contributions by the sponsor that we believe help support the credit. With that, I’d like to turn over to my colleague, Carlos.

Carlos Whitaker: Thanks, Jonathan. Turning to Slide 9. BXSL maintained its dividend distribution of $0.77 per share. We continue to deliver yield to shareholders. Building through steady regular dividends while also growing NAV per share. We expect this approach to continue as we believe we are heading into a period of increased deal activity driven by a pickup in M&A and private equity sponsor activity as managers look to take advantage of lower interest rates. I echo Brad’s point earlier on the strength of BXCI’s deal pipeline owed to the scale and platform of Blackstone. The BXCI advantages we have allowed us to be active with our existing companies while expanding the portfolio with newer borrowers and enhancing the quality of our assets.

Accordingly, we focus on transactions with borrowers with what we view as strong business models or those that have more sticky customer bases. Jon already provided a few stats on our new deals for the quarter, but just focusing on our top five new investments by fair market value during the third quarter, BXCI was the sole or lead lender in every case. And 100% of these were first lien allowing us to maintain some of the portfolio tenants we have been discussing, leadership and control. As the market remains competitive with both public market alternatives and the rising number of new credit funds, we have found that BXCI’s platform is even more sought after by companies and sponsors alike. In fact, 2024 is on track to be BXSL’s busiest year of deployment since 2021, despite a muted M&A environment.

The core drivers of this expansion have been. First, our ability to transact across the middle market and the expanding large-cap market with speed and certainty. From a capital standpoint, we believe middle market companies desire partnering with Blackstone because our deep pockets of capital can help them grow. Second, we continue to expand our focus on some of our favorite thematic neighborhoods. Blackstone has established leading platforms in what we view as compelling high-growth areas, coupled with several experts in these fields, helping to add value to the diligence process alongside our partners. Third, once we make an investment, we try to be more than capital providers, BXCI’s value creation program today is used by 90% and of the BXCI portfolio companies where the service is offered and can help create equity value either by plugging borrowers into the Blackstone ecosystem and reducing costs or by simply saving them capital through our group procurement system.

Middle market companies that may not have the scale of large caps, particularly enjoy having access to these resources. Truly unique and a private credit space. We believe passionately in these advantages, and we believe our investors will benefit as a result, whether it be BXSL’s increased deployment, BXSL’s lowest nonaccrual rate across our traded BDC peers or third-party validation of the BXCI platform as demonstrated by Moody’s recent upgrade of Blackstone’s two BDCs to Baa2. We believe these are all the results of our deep focus on driving differentiated results for our investors. And with that, I will turn it over to Teddy.

Teddy Desloge: Thanks, Carlos. I’ll start with our operating results on Slide 10. In the third quarter, BXSL’s net investment income was $186 million or $0.91 per share, up 16% year-over-year and the highest dollar amount since inception. Total investment income for the quarter also a dollar-based record for the fund was up $59 million or 21% year-over-year, driven by increased interest income. As a reminder, we amortized 100% of OID earned over the life of each loan versus taking these upfront, which we believe leads to greater stability over the long term. Interest income, excluding PIK, fees and dividends represented nearly 94% of our total investment income in the quarter. Turning to the balance sheet on Slide 11. We ended the quarter with nearly $12 billion of total portfolio investments at fair value, $6.4 billion of outstanding debt and $5.7 billion of total net assets.

NAV per share increased to $27.27 or 0.3%, up from $27.19 last quarter, driven primarily by stable fundamentals across the majority of our portfolio, excess earnings and share issuance above NAV. This represents the eighth consecutive quarter of NAV per share growth. Moving to Slide 12. In addition, we saw the most active course since 2021 on a deployment basis, as Brad outlined, with BXSL funding approximately $956 million in the quarter, committing to over $1.1 billion and an estimated additional $113 million committed by BXCI and earmarked for BXSL as of September 30. Net funded investment activity in the quarter was approximately $660 million, up over 250% year-over-year. We saw $292 million of repayments in the quarter, bringing year-to-date repayment rate to 6%, which compares to 10% for all of 2023.

And as we look forward, we would expect portfolio turnover to increase with M&A volumes in the declining rate environment. Next Slide 13 outlines our attractive and diverse liability profile, which includes 44% of drawn debt and unsecured bonds that are not swapped. These unsecured bonds have a weighted average fixed coupon of less than 3%, which we view as a key advantage in an elevated rate environment and contributed to an overall weighted average interest rate on our borrowings of 5.45%. That compares to a weighted average yield at fair value on our performing debt investments of 11.2%. This quarter, we maintained our three investment-grade corporate credit ratings. And as Brad mentioned, we earned a full notch upgrade from Moody’s to Baa2 from Baa3.

This was on the heels of being the first listed BDC to receive an improved outlook from stable to positive by Moody’s last year and a full notch upgrade in Q1 by Fitch to BBB flat. BXSL is one of three BDCs with a Baa2 rating, two of which are managed by Blackstone, a testament to our disciplined approach to portfolio construction, defensive positioning and conservative liability structure. We have no maturities on our funded liabilities until 2026, and our debt and funding facilities have an overall weighted average maturity of 3.1 years. We upsized our corporate revolver by $300 million this quarter, while tightening the lowest tier drawn spread by 22.5 basis points to SOFR plus 152.5 basis points. Another testament to our platform and our focus on driving down financing costs to further improve our balance sheet.

Post quarter end, we have continued to seek to optimize our cost of capital. we issued a $400 million 3.5-year bond, which priced at a 5.35% coupon or 163 basis points over the relevant benchmark treasury rate. Year-to-date, BXSL claims the top two spots for tightest spread BDC bond issuances. Additionally, post quarter end, BXSL’s first $750 million CLO priced at SOFR plus 154 through 61% loan to value, including the senior notes portion pricing at SOFR plus 151, the tightest spread on the senior most notes of any middle market private credit CLO among the 200-plus issued CLOs since 2021. So just to pull all that together, BXCL has one of the lowest costs of financing in the BDC space. Our revolver at SOFR plus 152.5, our bonds issued this year and our first CLO at SOFR plus 154 have all priced tighter than those of our traded BDC peers to the benefit of our investors.

Total liquidity at quarter end was $1.1 billion in cash and undrawn debt available to borrow and ending leverage as of September 30 was 1.12 turns, about flat from the second quarter and near the midpoint of our target range of 1 to 1.25. We have positioned our balance sheet with significant excess capacity to support continued pipeline momentum we see through year-end as rates may fall further. With that, I’ll ask the operator to open it up for questions. Thank you.

Operator: [Operator Instructions] We go first to Finian O’Shea with Wells Fargo Securities.

Finian O’Shea: Just one for me. So, with facing market headwinds to earnings, namely base rates, but other spread, debt financing costs, et cetera. Can you touch on the amount of spillover you’ve built up? And to the extent that’s meaningful, what your approach to managing that might be?

Jonathan Bock: Sure, I can speak to the spillover point and then maybe Brad or Teddy can also talk about kind of the long-term return, Fin. So, if you measure ICTI today, it’s roughly about $1.82 a share for spillover, so nearly a little over two quarters worth of dividends or around 5% of NAV. I think the important item to take away is you start to view spillover is how the long-term earnings trend and how long-term return trend looks on your book. Because what spillover does is it magnifies it magnifies on the way up, right, to the extent that you’re retaining capital, reinvesting and growing your earnings, that’s great if you have great and strong long-term performance. But what it does is it also magnifies on the way down.

So, to the extent that you have increasing nonaccruals, losses, et cetera, you start to find that clearly that you can run into some dividend issues and returns of capital that may be suboptimal for investors in the longer-term outlook. For us, that long-term return profile has been very strong, in part because of strong underwriting as well as attractive, maintaining leverage and well actively growing. So, I’d say spillover, that’s the number. Our focus is always on ensuring that you keep adequate spillover so long as you generate attractive return. And then I’ll pass it to my colleague, Brad on forward market look.

Brad Marshall: Yes. in. So I agree with some of your sentiment that yields are coming down because spreads have tightened from last year’s highs and rates have come down over the past couple of sessions. But I don’t think that necessarily paints the full picture. Obviously, with high rates and high spreads, there was a very low deal volume deal activity. I think 2023, there was a Morgan Stanley article this morning that said that 2023 was the lowest M&A in 30 years on a GDP adjusted basis. So, what lower spreads and lower rates will do is accelerate the deal environment. That’s good for turnover. That’s good for fee generation. So, we’re actually quite positive on the outlook and positioning ourselves accordingly. So just something to kind of — there’s obviously two sides to it. Lower rates will obviously help the portfolio companies as well. I do think 2025 will be a super cycle for deal volume, and I think investors will benefit from that.

Operator: We’ll go next to Casey Alexander with Compass Point.

Casey Alexander: Brad, I’m going to steal that term super cycle for M&A volume with your permission. I’d love to know just in a normalized M&A environment where you’re getting an appropriate level of churn in the portfolio. Relative to today’s earnings, what could that add in a range of cents per share to today’s earnings in a more normalized M&A volume? I mean, how much leverage is there to those fees and accelerated income.

Brad Marshall: So, permission granted. So good luck with that. So, what I would say a couple of things that — couple of things that will drive earnings from a more active M&A market. Clearly, right now, we’re in the mid-range of our kind of leverage. So, we have the ability to take leverage up a little bit higher in a more active deal environment. If you think about kind of deals, at least with Blackstone, we amortize the fees over the life of the loan. So, if those loans turn over a little bit quicker. You have an acceleration of those fees in addition to the fact that you may have some call protection that materializes. So, I’m not sure we’ll put an exact figure on it. Casey, but I think as you think about doing your own math and 20%, 25% turnover in the portfolio and the average fee being about two points you can probably start to back into some numbers from there.

Casey Alexander: All right. And since you said good luck with that, I think what I’ll do is I’ll quote you on it as opposed to stealing it. Secondly, in…

Brad Marshall: The partnership, I appreciate it, Casey.

Casey Alexander: Okay. Given the obvious high-quality nature of the portfolio and you did just mention something relative to that, and I understand your desire to have a great credit rating. But why doesn’t this platform naturally operate at a leverage ratio that’s actually a little higher than 1x to 1.25x?

Brad Marshall: Well, we do care about our rating quite a bit, and you’re seeing the benefits of that. If you look at the bonds, Teddy mentioned, those were the tightest bonds issued year-to-date, the CLO, the tightest of the year. Our revolver is tighter than everyone else in the market. So, all of those things are material return drivers that no one gives enough credit to, and it’s because of the quality of assets, it’s because of upgrades that we get like the one we just got from Moody’s. So, it is a return driver, Casey, and it goes into our calculus on how to manage our portfolio towards a lower risk profile in order to maximize long-term returns for our investors, which, listen, in credit, it’s not about the extra 25 or 50 basis points of spread.

I think that’s lost some people. It’s really about minimizing loss, and that is priority number one for us. You see it in the results. So, I’m glad that’s the case. But we’re very focused on all these different drivers and our rating and our liabilities is a big part of that.

Operator: We’ll go next to Robert Dodd with Raymond James.

Robert Dodd: And congrats on the quarter. I’ve got to say probably for anybody, but for Brad, this seems to be the most optimistic — we’ve heard you on the outlook for activity since maybe the fourth quarter of ’20, heading into 2021. The first time I think you’ve ever compared the outlook to kind of 2021 activity level. So, what gives you that elevated level of confidence? I mean, we’ve heard it for the last several years, hey, next year is going to be great. There’s a lot of dry powder. All of those things were true at the beginning of last year. They are true now, but you see much more confidence that’s going to happen now. So, what’s the real tipping point that pushes you into that level of optimism?

Brad Marshall: Great. Well, if you look at what’s changed, so the primary change over the course of this year has been both rates and spreads, which has lowered the cost of capital. And the outlook on the economy is much better than it was at the start of the year. So, both those things are maybe what’s different from the start of this year. In addition to that, you have the same drivers that we might have highlighted before, which is there’s a lot of dry powder with private equity sponsors, they need to return capital to their LPs. There has to be kind of turnover in their own portfolios. While that is true today. It was also true at the start of the year. So really what’s changed is you have a more clear outlook on the economy.

You have an administration now that will be quite supportive of deal activity and then you have cost of capital that’s come down to make valuations more transactable for both buyers and sellers. So, all of that put together are the reasons why we think 2025 will be a super cycle. And maybe just one overlay on top of that, it’s more anecdotal, but we’re out on the road myself in particular, talking to bankers, talking to sponsors, and every conversation I have had would confirm our view that next year will be quite busy. So, all signs seem to point quite positive.

Robert Dodd: Got it. And then just looking to forward spreads. And to your point, I mean, fee activity, avoiding losses are more important, et cetera, right? It’s not just about spreads, but spreads are pretty tight right now. I mean, are you seeing them stabilize? And what’s your over-under on whether they’re higher or lower this time next year and presuming a more active market.

Brad Marshall: Yes. So, I’ll take the other side of that argument, Robert. I don’t necessarily think spreads are extraordinarily tight. In fact, they’re in line with where they were in 2021. I think people think about the spread movement, which spreads were very, very wide in 2023. And so, both in the public markets, in the loan market, high-yield market and in the private credit market, you’ve seen spreads come down off their peaks, which were arguably too high in 2023 for a variety of reasons. So, I think spreads are more in line with historical levels. I would say, however, that spreads per unit of risk are actually better than they were in 2021. Leverage is lower just because capital is a little bit more expensive. And so, we view this environment as actually quite healthy.

And again, our job for investors is to deliver a premium over what they can get in the public markets, and I would say private credit continues to have a very attractive return premium relative to the public markets, which have tightened more than the private markets.

Operator: [Operator Instructions] We’ll go next to Kenneth Lee with RBC Capital Markets.

Kenneth Lee: Just in terms of the — some of the recent originations and the commitments you’ve been seeing. Any color on the terms documentation trends that you’re seeing any loosening of such items?

Brad Marshall: Yes, I’m happy to take that. You’re right, despite what’s been a little bit of a sluggish M&A environment, we’ve seen a fairly strong deployment opportunity. We had our most active quarter from a funding perspective. A few key stats I would call out about 75% of our activity, we were sold or leave about 35% to 40% was where we had in common to you. So, we’ve been really leaning into not only our public exposure but also our private exporter to generate activity. In terms of specifically your question, economics, average spread on new deals committed was in that sort of 500 to 515 context with about 1.5 points upfront OID, average LTV of right around 40%. And that activity is relatively split across the market.

We had half of our deals closed below $100 million of EBITDA, half above $100 million. What we’re seeing from a documentation perspective is that we’ve been successful at really leaning into the key parts of the document where we see dispersion in recoveries in the public market. So that’s collateral coverage, that’s EBITDA add-backs or collateral protections and EBITDA add-backs. And so, as we look at our portfolio, nearly 100% of our documents have protections around those items. That’s where you’re really seeing the weakness play through the public market leading to lower recoveries.

Carlos Whitaker: And Ken, maybe I would just add. I think the fourth quarter spreads will get a little bit wider than what we saw in the third quarter because third quarter was reflecting deals that we saw through the summer, summer is when you saw spreads at their tightest, so it does feel like they’ve widened out a little bit from here.

Kenneth Lee: Got you. Very helpful there. And just one follow-up, if I may. Last few quarters, you talked about seeing some benefit from reverse originations. Just wanted to see if there’s any update in terms of the outlook and how much contribution you could see from that in addition to, obviously, a more favorable deal outlook going forward?

Brad Marshall: Yes. So, I think, Ken, what you’re speaking to is sort of our reverse opportunities where we’ve been reversing into a pipeline of opportunities where we’ve had exposure on the public side. That effort has continued. It’s led to a pretty meaningful deployment this year. Again, that’s baked into sort of the 35% to 40% of activity where we have incumbency. So that’s an ongoing effort of ours, a benefit of the platform given as a firm, we are invested in or cover over 4,000 companies.

Operator: We’ll take our next question from Paul Johnson with KBW.

Paul Johnson: In terms of the optimism for activity next year, I mean, where do you kind of see the target for — in terms of company borrower size? Are you still kind of looking further upmarket closer to that average EBITDA, $194 million within the portfolio skewing more towards kind of that upper middle market investment grade borrower? Or are you looking at potentially funding more of the middle market kind of deals?

Brad Marshall: Yes. Thanks, Paul. So, what’s great about our platforms, we do see the full range of deals, small deals, midsized deals, large deals. I would say this year, we actually passed on a lot of the larger deals. Typically, when spreads tighten, people start reaching for risk a bit more and some of the larger deals we just let go because we didn’t like the leverage levels or the documentation. So, we were less active in that part of the market, and we’re more active in the middle market. I will say we do have a bias towards the larger companies. We think they’re better businesses. better sponsors, better management teams, more diversified, they’re larger because they’re better. So, to the extent that, that market presents itself as being more attractive more broadly.

We will lean into that part of the market. Again, we will continue to evaluate the rest of the market as we compare it to those larger deals. My sense is if this year we skewed more middle market next year, we may skew a little bit further upmarket, if the volume picks up and the deals are structured appropriately.

Operator: We’ll take our next question from Mark Hughes with Truist Securities.

Mark Hughes: On PIK income, pretty small, but had been kind of moving up in earlier quarters, it was down a little bit sequentially in the third quarter. Any thoughts on the future trajectory there?

Brad Marshall: Yes. Thanks, Mark. You’re right. So, take represented about 6% of income that was lower versus the last quarter. We had one issuer roll off and was actually paying full cash in September. So that’s really the impact you see. Over 70% of our PIK is really from the top five assets. All of those are performing marked above 90 and then less than 1% of our gross income is PIK associated with assets marked below 90. I think, generally speaking, PIK has been a good tool to differentiate versus the public markets. But our view is quality really needs to line up with that. It’s where you’re seeing better earnings growth. Generally speaking, we’re structuring it in a way where that optionality is limited to less than 24 months, and you’re earning a little bit of premium for allowing that option.

Mark Hughes: Very good. And then your opportunity to generate fee income if we do get more repayments. You talked about the fees around call protection, accelerated amortization. Given the composition of the portfolio now just the age, the time it’s been on your books, how would you compare that potential if we do get in a super cycle or fee income relative to levels we might have seen in the past? Is there any material difference?

Brad Marshall: Yes. Just to put some numbers to it, our amortized cost in the portfolio is just above 98.5. So, with that, and you can apply sort of a normalized repayment rate that we would expect in the sort of anywhere from 15% to 25% range, right? Year-to-date, our repayments are 6%. So, I think that gives a little bit of detail on how that income generation piece could trend next year.

Operator: We’ll take our next question from Melissa — I’m sorry, we’ll take our final question from Melissa Wedel with JPMorgan.

Melissa Wedel: Most were actually already asked and answered. I thought I’d follow up on the aftermarket program. This seems to be a particularly productive quarter for capital raising there. Given your bullishness on the market, the deployment potential of the upcoming environment, do you anticipate sort of a similar run rate going forward in the aftermarket program? Or should we think about that as being — coming in just a little bit if you expect higher turnover in the portfolio.

Jonathan Bock: Thanks, Melissa. This is Jon. I’d say it’s less trying to book what you think a run rate will be and we’re recognizing that while we see a heavy deal of optimism coming around the deal environment, it’s really hard to time, right? So, what we do is always first check based on our leverage. We want to deliver an attractive levered return we always do so right in the middle of that range and are on the higher side as best as possible. And then once you look at that levered return, you can recognize that there’s the ability to issue some but then also recognize that we find that having that ability to invest when the deals come as we expect is important. So, I’d say that it’s less trying to say, last year’s — or last quarter, it’s the same as this quarter and much more kind of recognizing we build it based on what we know is going to come, and we’re anticipating, as Brad outlined, a super cycle that will be important for us all to put capital to work.

Operator: And with no additional questions in queue. I’d like to turn the call back over to Ms. Wang for any additional or closing remarks.

Stacy Wang: Thank you, everybody, for joining our call this quarter. Have a great rest of your day.

Operator: That will conclude today’s call. We appreciate your participation.