Operator: [Operator Instructions]. We will go first to Finian O’Shea with Wells Fargo Securities.
Finian O’Shea: Hey, everyone. Good morning. Thanks for having me on. Interesting comment at the end by Teddy there on the repricings. I guess first how many like, if you can offer us color, happened post quarter with the major DSL come back and then just higher level is — I’m not sure repricing has been a concept in direct lending. If you could touch on — if this is a market evolution that’s kind of happening in real time. Thank you.
Teddy Desloge: Yeah, thanks, Finn. So on your first question, repricing activity has continued not to overly sort of material extent. I think if you look at the capital structures where we have agreed to repricings, some of these were set up at a clearly higher rate environment or higher spread environment. The average spread on the deal that we repriced in Q4, we’re just over actually right around inside of or outside of where the market is today. all of those were met with new call protection. So we make that trade to extend duration in the portfolio.
Brad Marshall: Finn, it’s Brad. I would say it is a bit of a new phenomena, but you always have the option to take your capital back at your call protection. And that’s why it’s important to have call protection in deals. But on the higher quality assets. If they de-levered, we’re usually okay with extending duration on those types of assets.
Finian O’Shea: Okay, that’s helpful. Thank you. And I guess for my follow-up, can you talk about the strategy with capital raising. You’ve kind of leverages done from 130 to 1 over the course of the year, mostly on account of the ATM. I know you gave some constructive comment on deployment, the deployment outlook, but it’s not that meaningful yet. So are you still pedal to the metal post quarter and how are you looking at that today? Thank you.
Jonathan Bock: Hey Finn, it’s Bock. I’d outline that, not a pedal to the metal focus. You size the equity capital based on the opportunity set as your forward pipeline develops. And you’ve seen and you’ve heard Brad’s comments on the development of the forward pipeline. I think what he’s outlining is that we have access to their high-quality investors through the ATM program, some of them are very large in nature. And our goal will be to ensure that we’re sizing the equity growth, ensure that we’re generating attractive return. And so monitoring that on a daily or quarterly basis. So you’re starting to see a build in pipe. You’d expect to see a level of build in capital, but you don’t let that overwhelm the forward returns.
Brad Marshall: And Finn, I’ll just add to that. So I think we see things maybe a little bit before the market in terms of pipeline building and assets and deployment. You certainly saw some of that get reflected. As we said, the fourth quarter was our busiest quarter since 2021. So we are seeing a material uptick in activity. Some of that’s being driven just by incumbency, not in the existing portfolio, but across our BXCI portfolio where we can kind of originate deals on a proprietary basis. Just to give you some stats, I think we said this, but pipelines of about 2 times larger than that it was maybe six months ago. And even in the past couple of weeks, the deal flow coming in from sell-side advisers has more than doubled.
So we’re always going to be thinking about our capital structure to make sure we can take advantage of what’s in front of us. Recognize kind of your points leverage has come down but again, it’s on the back of very, very active investment activity in the fourth quarter and we’ll see how the first quarter develops.
Operator: We will go next to Ken Lee with RBC Capital Markets.
Ken Lee: Hey, good morning. Thanks for taking my question. In terms of the normalization of the broadly syndicated loan markets, wondering if you could just share your thoughts on how you think this could impact either the pace or the mix of new originations they could be seeing this year. Thanks.
Brad Marshall: So yeah, the broadly syndicated markets have been quite, I wouldn’t say active because most of the activity is beyond repricing, there hasn’t been much of a new calendar to come to the market. But it has tightened quite a bit, probably by at least 50 basis points in the first couple of months of the year. And I would say the private markets are somewhat keyed off of the public markets. So one could expect asset spreads coming in across the private market. We do have a pretty broad deal funnel globally. So we can pick our spots with BXSL. Again, the fourth quarter activity, the spreads were in line with the assets that we deployed, we’re in line with the assets came out. So we’re kind of keeping pace. Spreads are both a positive and a negative.
And so maybe just to hit on that. As spreads tighten all else being equal asset, prices should increase. So it does have and I said this in my comments, a little bit of an upward driver on the price of your existing assets. So that’s positive. Lower spreads, lower rates does increased deal activity, market activity, or at least it should. And that creates more turnover and more fee acceleration. So that’s another positive. And then of course, it is a little bit of a headwind potentially on new assets. But even if 20% of your portfolio was being invested in this market, it has what, 10 basis points of impact on the yield of the portfolio. And the fees that you’re getting on an accelerated basis more than offsets that. So there are some pros and cons.
And you will continue to see us pick our spots in this market with the benefit of having a really wide and deep deal funnel.
Ken Lee: Very helpful there. And just one follow-up, if I may. In terms of the activity that you’re seeing in the pipeline, sounds pretty robust. Is there any particular drivers that you’re seeing commonalities across activity there any particular sectors? I just want to get a little bit more color on what you’re seeing there. Thanks.
Teddy Desloge: Yes, on the pipeline I think that the — a couple of things I would highlight is first similar to sector exposures. As Bock mentioned, what we deployed in the fourth quarter is consistent to what we’re seeing in the pipeline. Two is larger capital structure. So as Brad mentioned, double the volume, more than double the volume of larger than $1 billion transactions in the pipeline. I think generally speaking, we are optimistic about the M&A environment this year. We see that early in our pipeline. I think one thing we do need to see is continued sort of narrowing between valuation between buyers and sellers. And that’s starting to happen, certainly helps with the prospect of lower cost to capital on the horizon with, as Brad mentioned, spreads tightening modestly and then the prospect for lower rates coming down towards the back half of this year.
Brad Marshall: And what I’d just add to that, Ken, is I would say, at least half of our deal flow right now, we’re going into the market and creating. So take health comp, which we did in the fourth quarter. We were the only capital provider that was around that, we are the incumbent, we had a strategic angle across our value-add group, we could do the whole capital structure. So these are the types of transactions that we’re leaning into in this market. We’re going to — we committed to another deal this week. That’s fairly large over $1 billion in size, and no one else kind of saw that deal. And these are some of the things I was trying to get across with my message on even in a market with a broadly syndicated activity as robust from a spread standpoint, we will continue to drive deal flow that’s accretive to BXSL in our opinion.
So lots of different ways that we can kind of go about this, but that’s where we’re seeing deal flow mostly from things that we’re creating.
Operator: [Operator Instructions]. We will go next to Melissa Wedel with JPMorgan.
Melissa Wedel: Good morning. Thanks for taking my questions today. I wanted to also follow up on the comments about the pipeline and how rich, that seems to be right now. But I think that we’ve heard from a few different management teams that while there’s pick up, its sort of early this year. A lot of folks are expecting particularly increased volume in the back half of this year. Are you seeing anything differently than that? And then also, what does that imply for sort of repayments or assets to counter that? Are we seeing refi activity or is this sort of a net originations environment? Thank you.
Jonathan Bock: I can do the repayment point because it ties to what Teddy mentioned as it relates to repricings. And then as it relates to the pipeline, Bill and Teddy can build out a few of those comments. So eventually if as we’re proactive both in sourcing deals and also proactive in defending them. You’ve seen both year to date and near term repayment remain muted. And so that’s a function of our view that an asset on our books still at attractive illiquidity and credit spreads relative to our cost base is a decision we’re choosing to make. And so I think from a repayments perspective, we’re trending better than expected. And then as it relates to deployment, I’ll turn to my colleague.
Teddy Desloge: Yeah, I think it’s consistent with Brad’s comments, we’re generally seeing deals earlier stage. A lot of what we’re working on today are sell-side commitments prior to deal launching. So I think a lot of that does come to fruition in the back half of this year. In the meantime, there were a couple of situations, particularly last quarter where sell-side processes, M&A processes fell apart because of valuations. We were then able to show up with a sole financing source for a recap ahead of another process. So those are situations that were very in front of a lot of those we have incumbency didactic today, whether there are other positions we have in the liquid side or privatization.
Brad Marshall: The activity picking up in the second half of this year, I would agree with that comment. But I think most of the comments are, we hope that activity picks up in the second half as what you’re hearing from others. Hope is not a strategy. So we’re out trying to kind of develop our own deal flow in the absence of a more active M&A market. A logic holds true that activity should pick up, but we’re certainly not going to sit back and wait for that to happen. And PE activity being light for the past two years, lots of dry powder, all that is very true. But I would look more towards our current comments, which are sell side M&A inbounds to us have increased twofold. The pipeline, which Teddy has highlighted is twice as large as it was not too long ago. So those are the kind of the near-term things that we’re seeing. And then yes, we also hope that the broader market picks up, but will go out and find deals in the absence of that.
Melissa Wedel: Understood. If I could follow up also on Finn’s question. The repricings that you did, I think that’s what you’re referring to when you talk about finding the deals yourself and sort of being proactive. Are those deals that can see or companies that could have conceivably refinanced in the broadly syndicated market? Thank you.
Teddy Desloge: Yeah, thanks for that. Those deals were actually separate. So those deals were capital structure setup in a clearly wider spread environment. So average, SOFR on those were 600 to closer to 625, where performance has exceeded our expectations from a credit perspective. Those did have some access to the public markets, we were able to reset call protection, extend duration on those. The deals that Brad was referring to were more public capital structure that actually see value in going private. And that was one of the deals that he was referring to that’s closing shortly. There are ways that private lenders can differentiate from the syndicated market. We’ve been seeing that in our pipeline, certainly around delayed draw capacity, providing capacity for M&A, and certainty of execution. Those are some areas where we’re seeing differentiation and where we can utilize those strengths to really drive our own deal flow.
Brad Marshall: The most helpful to numbers that we have 100 deals that we identified at the end of the fourth quarter that we want to reverse into the company to try and create deal flow. They may have a maturity, they may need growth capital, they may prefer a more private capital structure. So even when the public markets are active, we can go in and create something that’s a little bit more customized for them. And you can only do that if you have scale. So in a couple of deals, we’ll likely close shortly. They are well over $1 billion we’ll be the sole or the large majority anyways of those capital structures we’ll bring in some others. And you can only do that if you have incumbency across your platform, you can only do that if you have scale, and you can only do that obviously if you have a more proactive mindset.
Operator: We will go next to Casey Alexander with Compass Points.
Casey Alexander: Hi, good morning and thanks for taking my questions. You’ve talked about spreads appear to be tightening and interest rates were actually down broadly in the fourth quarter, which should have been supportive for the general marks of the portfolio. But can you contour that against the $23 million of unrealized depreciation in the quarter and give us a feel for what caused that relative to what should have been a pretty good pricing environment?
Teddy Desloge: Yeah, I’m happy to take that. So the $23 million of unrealized depreciation, some of that was a reversal of unrealized appreciation that we saw as it relates to repayments, right? We had over $5 million of repayments in the quarter. That was an annualized repayment number of just over 20%. So when that happens, you do have a reversal of unrealized gains. That was about a third of the move. The other two thirds were offset by some markups in the portfolio as well. Spreads from a valuation perspective in the quarter, we’re actually relatively flat. I think most of the spread tightening that we’ve seen, that we’re committed to in the quarter a deal that likely won’t close until the first quarter in the second quarter of this year. So I think there’s still some room to go on spreads tightening and haven’t fully seen that reflect in the market today.
Brad Marshall: Yeah, rates shouldn’t impact marks, Casey, so it’s more just the spreads and the spreads have come in more in the first quarter. I’d give you a couple of other stats, only 1.1% of the portfolio is marked below 90. That would be the asset — list of assets that were most focused on on 8.8% below 95. So the portfolio is still in really good shape, but we mark our assets to market. And so you’re seeing that in some movements up and some movements down.
Casey Alexander: Okay, thank you for that. And then secondly, what may be a minor point. But there was a reasonable rise in PIC income versus the third quarter and it’s about 5% of total investment income. Now can you give us a feel for how that fits into the rest of your comments earlier today?
Teddy Desloge: Yeah, let me take that. So PIC income was up modestly. It was up about 4% to 5% in the quarter. I don’t know if there’s anything specific to point out there. We have one position that did roll off in the quarter that had fixed flexibility that paid full cash. Offsetting that, we did have a couple smaller PIC amendments where we agreed to it. It is an area I think over time where you can see for higher-performing situations, low LTV in good sectors with good fundamentals, a scenario where you can see a little bit of differentiation from the syndicated market. So yes, I think there is a difference between PIC because of underperformance versus PIC due to new deals or differentiation versus public markets.
Brad Marshall: And again, I’ll just add some numbers. We had a couple of smaller ones get added, a couple and then four dropped. The ones that got added, the average market of that of those assets is 97 approximately. So just give you a sense that they’re kind of performing assets, they’re marked in and around cost. But they’ve elected, part of their PIC option. I still think 5%, Casey is probably at the low end of the industry. So still no trend that you’re seeing other than yes, as rates stay high companies have the option, they’re going to use it.
Operator: We will go next to Mark Hughes with Truist.
Mark Hughes: Yeah, thanks. Good morning. You talked about the new deals this quarter. I think $130 million, an average EBITDA of your overall norm is $190 million plus. Anything to that notwithstanding, you talked about some bigger deals that are better out there. Did you find a little more attractive pricing at the maybe the lower middle end of the market?
Teddy Desloge: Yeah, I don’t think there’s there’s anything specific to point out there. We have seen growth in the existing portfolio, organic and M&A growth, which is driving growth of our existing existing deals. There were a handful of deals that we closed that were sort of sub $120 million that were still very high quality. So really no change in strategy to point out there.
Mark Hughes: And then anything in your healthcare exposure, you want to highlight or not highlight, given some of the events in the industry, some other credit issues?
Teddy Desloge: Yeah, I think the healthcare exposures is one area we spent a lot of our time. We do have a team that specializes in healthcare, but that’s it’s in our investment team. We see everything. I think the areas overall, where we see stress or what we’ve mentioned before, business models with high components of labor inflation, business models that are more tied to regulatory pressure or business models that are more commoditized. Where we focus our capital is, it’s really on more specialized models that aren’t seeing much of that pressure. There are a couple of situations we are focused on that are rollups that have a little bit more cash flow constrained as rates are higher. But overall, I have seen relatively good performance in that part of the portfolio.
Jonathan Bock: And Mark, to add to that. If you think about it, while we’re inflated from a lot of the trends you might have seen in other PPMs or physician’s practice, we’re not completely immune. And to the extent that you see an area where in a — whether it be an indicative level of stress that’s also found and reflected in the market. And we’re very focused on those situations. Clearly they’re very small, but at the same time, we will ensure that level of stress is reflected in the markets, which you can see in the .
Operator: We will go next to Paul Johnson with KBW.
Paul Johnson: Yeah, good morning. Thanks for taking my questions. Brad sort of answered my question here in terms of the opportunity that you see in the portfolio in terms of repricing. But I guess you identified 100 deals. I mean, would you describe that as a pretty meaningful in the portfolio in terms of driving the pipeline? Or is that more or less kind of just low hanging fruit that you expect to be picked relatively quick? And then also on that, one more question, is just how much work, I guess is it to execute a repricing transactions. It’s just kind of a matter calling on the sponsor and discussing the repricing or do you basically effectively re-underwrite the transaction?
Brad Marshall: Yeah. And Paul, just to reiterate what Teddy mentioned, there is a distinct difference between repricings and reverse deal flow. Repricing that you own the asset, the sponsor reaches out, says, hey we know we have call protection, but we want you to reprice and we are to say yay or nay. We usually ask for something in exchange. Usually reset the call protection if we say yay. Reverses are entirely different. These are things that we don’t own that were going into the market. We’re trying to create new deals. And in those situations, If I said, it was 100 of those deals. We’ve actually gone through 33 of them through our kind of review process. And reaching out the sponsor is 80% of those they’ve said, no not yet or the pricing’s too high.
And so they go back on the shelf. And the other ones we’re working through. So that’s, it’s very different. So when you think about our platform, we are invested in BXCI in over 3,000 companies. So we can mine our portfolios, we can create ideas, we can play the role of banker with a balance sheet. It’s a highly differentiated platform than almost anyone in the market. And that’s what we’re focused on from a reverse standpoint. Very different than the repricing exercise that we’ll invariably kind of have to go through as the market strengthens.
