Blue Owl Capital Corporation (NYSE:OBDC) Q4 2023 Earnings Call Transcript

Blue Owl Capital Corporation (NYSE:OBDC) Q4 2023 Earnings Call Transcript February 22, 2024

Blue Owl Capital Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the Blue Owl Capital Corp. Q4 and Fiscal Year 2023 Earnings Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Dana Sclafani, Head of BDC Investor Relations for Blue Owl. Please go ahead, Dana.

Dana Sclafani: Thank you, operator. Good morning, everyone, and welcome to Blue Owl Capital Corporation’s Fourth Quarter Earnings Call. Joining me this morning are our Chief Executive Officer, Craig Packer; and our Chief Financial Officer and Chief Operating Officer, Jonathan Lamm, as well as Alexis Maged, our Chief Credit Officer; and Logan Nicholson, Portfolio Manager for OBDC. I’d like to remind our listeners that remarks made during today’s call may contain forward-looking statements, which are not a guarantee of few performance or results and involve a number of risks and uncertainties that are outside the company’s control. Actual results may differ materially from those in forward-looking statements as a result of a number of factors, including those described in OBDC’s filings with the SEC.

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The company assumes no obligation to update any forward-looking statements. Certain information discussed on this call and in our 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. OBDC’s earnings release, 10-K and supplemental earnings presentation are available on the Investor Relations section of our website at blueowlcapitalcorporation.com. With that, I will turn the call over to Craig.

Craig Packer: Thanks, Dana. Good morning, everyone, and thank you all for joining us today. We are very pleased to report another record quarter of earnings with continued excellent credit performance across the portfolio. Net investment income was $0.51 per share, up $0.02 from last quarter. Our NII increased in each quarter of 2023, we generated new record NII for the fourth consecutive quarter. In total, we earned $1.93 of NII in 2023, up $0.52 or 37% year-over-year. Our strong results throughout the year are the outcome of our emphasis on great credit selection and a proactive approach to liability management. Results also benefited from the higher rate environment and continued strong economic conditions. Based on these results, our Board has approved another $0.02 increase in our base dividend to $0.37 per share.

This is our third $0.02 increase since the fourth quarter of 2022. This reflects our strong results to date and incorporates our expectations for the future trajectory of earnings even in a more normalized rate environment. In addition, for the fourth quarter, our Board declared a supplemental dividend of $0.08. We instituted the supplemental dividend framework in the third quarter of 2022 to allow shareholders to participate in earnings upside in a predictable manner, and we are pleased to pay $0.36 per share of supplemental dividends over these last six quarters also meaningfully growing net asset value. Going forward, we believe shareholders will continue to benefit from the supplemental dividend framework. Net asset value per share increased to $15.45, up $0.05 from the third quarter.

This represents the highest NAV per share since our inception in the second quarter in a row of record net asset value. As a result of strong earnings and continued NAV growth, we earned a record 13.2% return on equity in the fourth quarter, resulting in an annual ROE of 12.7% for the full year. This is right in line with the expectations we set at our Investor Day in May. Looking at our borrowers results, we saw continued resilience across our portfolio companies throughout 2023. We came into the year appropriately cautious and prepared for a more challenging economic environment. Over the last 12 months, our borrowers on average, delivered low to mid-single-digit growth in both revenue and EBITDA each quarter. They were proactive in cutting costs and raising prices where appropriate to combat inflationary pressure and supply chain challenges.

These initiatives contributed to the solid performance we saw this year. Further, we believe our borrowers are well-positioned coming into 2024. Our largest sectors continue to be software, insurance brokerage, food and beverage and health care, all of which serve diversified and durable end markets. The weighted average EBITDA of our portfolio companies is over $200 million, and we believe this scale provides strategic benefits and operational stability as many of our borrowers remain market leaders within their sectors. Looking forward, while markets are expecting rates to decline, short-term rates remain elevated, now that we remain focused on potential portfolio company challenges. We believe coverage levels will trough in the first half of 2024 at around 1.5x to 1.6x interest coverage.

We continue to have a small list of borrowers who we believe may see challenges in the months ahead. Our underwriting and portfolio management teams are closely monitoring these situations and we believe any challenges ultimately will be manageable across our portfolio as a whole. I would note, we had a few borrowers migrate lower in our rating scale, but overall, the names on our watch list remains consistent. Based on the visibility we have today and the strong positioning of our borrowers, we expect that the vast majority of our portfolio companies will maintain solid coverage metrics and adequate liquidity throughout this period. While we added one very small position to nonaccrual in the quarter for a total of four names, our nonaccrual rate remains low at 1.1% of the fair value of the debt portfolio.

Overall, our record year in 2023 demonstrates the resilience of our portfolio companies and the strength of our investment and portfolio management process. With that, I’ll turn it over to Jonathan to provide more detail on our financial results.

Jonathan Lamm: Thanks, Craig. We ended the quarter with total portfolio investments of $12.7 billion, outstanding debt of $7.1 billion and total net assets of $6 billion. Our fourth quarter NAV per share was $15.45, a $0.05 increase from our third quarter NAV per share of $15.40 attributable to the continued overall earning of our total dividends. In terms of deployment, we continue to largely match originations with repayments to maintain a fully invested portfolio. Repayments increased this quarter to $1.1 billion, which was matched by $1 billion of new investment fundings. This was a sizable increase compared to the roughly $390 million of repayments we saw in the third quarter as consistent with our belief that we will see an increase in repayments as the market environment continues to be more favorable for refinancings.

We ended the quarter with net leverage at 1.09x, down slightly from the prior quarter. This is largely reflective of the timing of repayments versus new originations in the quarter. Turning to the income statement. We earned a record $0.51 per share in the fourth quarter, up from $0.49 per share in the prior quarter. The increase in NII was driven by roughly $0.015 quarter-over-quarter increase of accelerated income, driven by a pickup in repayments as well as modest increases in our dividend and interest income. For the fourth quarter, the $0.08 per share supplemental dividend will be paid on March 15 and to shareholders of record on March 1. Reflecting this supplemental and the previously declared $0.35 regular dividend, shareholders will receive total dividends of $0.43 which equates to an annualized dividend yield of over 11% based on our NAV per share for the fourth quarter.

For the full year 2023, we paid a total of $1.59 per share in dividends, an increase of $0.30, roughly 25% from the prior year. The Board also declared a first quarter regular dividend of $0.37, which will be paid on April 15 to shareholders of record as of March 29. Pro forma for our new increased regular dividend coverage remains robust at 138%. We finished the year with $0.30 of spillover income as a result of meaningful overearning of our dividends, inclusive of our supplemental dividends throughout 2023. Turning to the balance sheet. We continue to proactively manage our liability structure to maximize returns to our shareholders. In the fourth quarter, we increased our revolver capacity to $1.9 billion and continue to maintain a robust liquidity position, which increased to $2.1 billion.

This is well in excess of our unfunded commitments to our portfolio companies. In January, we opportunistically raised $600 million in new 5-year unsecured notes. A portion of the proceeds will be used to repay our $400 million unsecured notes that mature in April 2024. Taken together, these actions will modestly improve our overall cost of unsecured financing and increase our total unsecured debt as a percentage of total debt to 61%. We continue to be very focused on maintaining a well-laddered liability structure and lowering our financing costs. The spread on this new issuance represents one of our tightest spreads to treasuries Further, we were able to swap this new issuance at a rate of S-plus 212 basis points, which when taken together with the maturity of the April 2024 notes is accretive to ROE for our shareholders and attractively priced relative to our current secured financing costs.

The BDC bond market continues to deepen and expand with investors. We are pleased to see investors recognition of OBDC’s high-quality portfolio and continued performance, which allowed us to drive improved pricing for this issuance, even in a higher rate environment. As we have since inception, we continue to be proactive at addressing our financing needs and continuing to deepen our investor base and improve our liability costs. With that, I’ll turn it back to Craig for closing comments.

Craig Packer: Thanks, Jonathan. To close, I wanted to spend a minute on what we are seeing in the market today and what we expect for 2024. We continue to see deal activity pick up in fourth quarter. As Jonathan noted, we had over $1 billion in both originations and repayments in OBDC. This nearly equates to the total activity we saw in the first 3 quarters combined. Across our broader Blue Owl direct lending platform, we deployed over $8 billion in the quarter, the highest quarterly level since 2021. We continue to believe the scale of our platform is an advantage for OBDC as our large origination effort allows us to efficiently match our repayment and deployment activity each quarter in order to maintain a fully invested portfolio and to scale up deployments in quarters where repayment activity is higher.

We closed on several attractive new deals in the fourth quarter, including the $1 billion-plus financings for [indiscernible], New Relic and IFS [indiscernible], all three of which Blue Owl serves as lead arranger [ph] and administrative agent on. We believe our role as administrative agent on these large deals demonstrates the private equity firm’s confidence in our platform and as importantly, positions us to maintain frequent dialogue and to have the greatest influence on credit documentation and terms. Further, we continue to benefit from incumbency across our portfolio, with significant add on activity for our current borrowers in the quarter. As noted earlier, repayments stepped up materially in the fourth quarter as we saw a more active market for refinancings and company exits.

We expect repayment activity to continue to revert to these higher, more normalized levels which could generate meaningful repayment income for OBDC. Looking forward, we expect to see increased market activity throughout 2024. We believe there is substantial pent-up desire for private equity firms to return capital to LPs by exiting companies and increased clarity on the rate environment that could more activity. That said, to date, activity in the first quarter has been lighter, which is consistent with the typical seasonality we see after many issuers seek to transact before year-end. Reflecting this dynamic, and with strengthening public and private markets, we are seeing some pressure on spreads across new investment opportunities. However, we continue to see larger and larger companies doing direct deals, the credit quality is some of the highest we’ve seen in our history and the structures and terms on new deals remain attractive.

Finally, on behalf of the entire OBDC management team, I want to reiterate how pleased we are to have delivered another quarter of impressive results. We are grateful to the investment and portfolio management teams who continue to assess new opportunities, carefully monitor our portfolio companies, the financing team who continues to optimize our liability structure and the entire Corporate Solutions group who support the company’s complex operations. As a result of these efforts, we delivered a total return of more than 40% to shareholders in 2023. We once again delivered record NII and a record high NAV per share ultimately providing a 12.7% ROE for the year to our shareholders. We are also pleased to be able to raise our regular dividend, which we believe reflects our continued confidence in the portfolio.

We are entering 2024 on strong foot and believe we are well-positioned for the year to come. With that, thank you for your time today, and we will now open the line for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question is coming from Brian McKenna from Citizen JMP. Your line is now live.

Brian McKenna: Okay, great. Good morning, everyone. So maybe just a question on credit quality to start. The portfolio is clearly in a very strong position today. But could you just provide any details on the one company you added to nonaccrual during the quarter? And then is there any update on the other three companies just in terms of resolving these. And then more broadly, can you talk about the size of your portfolio management team today? How much is related headcount grown over the last couple of years? And then where is the team spending a lot of their time today just given the low level of nonaccruals today?

Craig Packer: Good morning, Brian. You [indiscernible] like four questions in there. You’re going to have to remind me before the first couple. Look, overall, the team is really pleased with the credit quality of the portfolio. I think it’s pretty striking. I think back a year ago, rates as high as they were across the space. I think there was a lot of concern about how direct funding, credit quality would hold up. And here we are more than a year into this higher raise are in and we are really with credit quality across the board. And I would say the space is — overall has also been really strong. And I think it really is a testimony to the quality of the companies that are coming into the direct lending space, which is as high as it’s higher than it’s ever been.

We had a really de minimis position in a company [indiscernible] was less than the $15 million of exposure in OBDC. We had similarly small exposures in several other funds. And it was a business backed by a couple of private equity firms that we do a lot of business with and had some operational challenges, and it just is in a position where we felt it was appropriate to put it on call and we are working through with the borrower and the sponsors a plan going forward. So it’s a credit-specific issue to that business and not reflective of any greater credit issues. Beyond that, the other three names, nothing to report, in the case of two of them, well, I guess one of them, we’ve taken over the business. The other two will continue to work with the existing sponsors in.

I’ll just call out one of the name CIBT because I think it’s interesting. This is a business that has been on nonaccrual for us for several years now, was significantly impacted by COVID as a travel-oriented business. And it’s sponsors [ph] that worked really diligently over the last 4 years to try to rebuild the company in light of changing travel patterns and the like, and continue to own the business and support the business and we and the other vendors and the capital starts are working with them. We continue to have that particular position marks at a very low price. But we’ll see, we are hoping to do better. We’ll just have to see, but it really is a testimony to how are the private equity firms were to avoid being up the companies, and that’s very much central to our model.

I think you asked our resources, we have added significantly to our portfolio management and workout resources. Our investment team overall is 115 people there’s probably about 15 of those 115 that are doing whole time portfolio management and work out. Our approach to work out here is, some have the single growth, some are different. We have our existing underwriting teams involved in the credits even if they go into work out, they know the company is the best, and we think that connectivity and consistency is very valuable to maximizing recovery. So beyond our workout team, which is more than our size, we really use our whole team. My other firms have — they’re going approach a little more cushion to workout group, if you will. So I feel very comfortable that we have the capacity, there’s a business PLI we took over during COVID.

It’s been restructured. We own that business today. It’s not an accrual anymore. But if you walk through the marks of our — that acquisition, what you will see is the acquisition, although we took a realized loss way back in 2020, if you take the combined value of our debt and equity in that company today, it’s pretty much on top of where our original basis was in the business when we first made the loan. We haven’t realized on that yet, so I’m not declaring victory, but I think it ended in a direction where we’ll be able to report at some point that we are [indiscernible]. And I think it’s, again, a testimony to our ability to have a very long time horizon to take over a business, to work with an existing management team or supplement that with new management team and to play for long-term value creation.

And I think that that’s core to being a the scale of lending business that we are. Part of our value proposition is maximizing recovery. I think PLI will be hopefully a great case study when we realize it on our ability to do that. So Brian, I think I got most of it. I don’t know if I missed any, I’ll give you one more shot.

Brian McKenna: Yes. No, that’s great. I appreciate all that color. And I’ll hop back into the queue and congrats on another great quarter.

Craig Packer: Thank you.

Operator: Thank you. The next question is coming from Casey Alexander from Compass Point. Your line is now live.

Casey Alexander: Yes. Hi. Good morning and thank you for taking my questions. Again, everything I understand that Brian’s question sounded like four because everything is sort of connected. Your discussion about some tighter spreads, private equity refinancing is up private equity want to return money back and you, guys, work in the upper middle market. Does that all combine to, it seems like a little bit of rejuvenation of the broadly syndicated loan market. And is that contributing to some of the tighter spreads that you see in the upper middle market?

Craig Packer: Good morning, Casey. I think that’s very great word for rejuvenation. The bank’s willingness to commit to leverage finance deals is completely a function of there being a bid from buyers loans, primarily CLOs, and CLO creation rebounded towards the end of last year and has been quite healthy this year and the strengthening of the syndicated markets is giving the bank’s confidence to commit to deals. And the market is quite good. And so the banks are willing to commit, distribute and the pricing in that market can be attractive for certain companies. And so you’re seeing, I would say, a more normalization of the mix of flows, the normal market environment is a fully functioning public market and a fully functioning private market.

The trend has been decidedly towards private market execution and direct lending execution that, that trend has been going on for certainly since the history of our business and our growth has tracked that trend. But most normal market environments and most of our existence, the public markets have been open and have the banks have been on to finance deals and the sponsors have been increasingly picking direct. But in this environment, they’ve got choices, and they’re making those choices. And I think that’s [indiscernible] market environment, it does contribute to some of the spread impression in the first half of last year, the public markets were shot and natural direct lenders such as ourselves, could charge more and today top markets are open.

And so there’s a price chart there and that can contribute to spread compression to be fourth, right? I think spread compression is also a function of a really good economy. Expectation [ph] of rates are going to come down, it’s just general health of the markets. But the private credit has raised capital, we have capital, other direct owners have capital, and so there’s competition. So we are on the tight end of the range of spreads that we’ve seen in direct lending. I think it’s kind of troughed probably where it is now, but it’s on the tighter end of where things are. So I think that ends along we will swing back and forth. I’d like to talk about the secular and the cyclical. The secular trend is going to continue to be the direct lending.

There’ll be cyclical periods of time where [indiscernible] little more to the public markets, a little more to the private markets. Right now, I think it’s a pretty healthy balance and so you’re seeing some spread tightening.

Casey Alexander: Okay. Thank you. That’s very helpful. My follow-on question is, last 2 quarters, you’ve raised the base dividend a couple of times. In the face of what is generally a consensus that, as you mentioned, that rates are normalized some. So you got rates going one way and your base dividend going the other way. What gives you the confidence that you’re going to be able to maintain and cover that adequately as rates come down, is it potential growth of the JV or the specialty finance verticals? Or is it expanding the leverage ratio somewhat kind of a modest ratio right now? But I’m curious and holistically, how to mix all of those things together to make sure that the Board has confidence to raise the base dividend again.

Craig Packer: Sure. So I think that — we’ve tried to be really thoughtful about our dividends. I would pull the lens back to more than about 1.5 years ago, when it was clear rates gone up, and we felt really confident that the portfolio does not only to perform to generate, a really much higher set function, higher level of income. And we thought about how do we — what’s the right way to share that with shareholders. And we introduced this notion of a supplemental dividend. So shareholders would have a very predictable understanding how our earnings and higher rates that flow through to them. We thought that — and we got a lot of great feedback on it. I think that mechanism has worked really well. And so we had our base dividend at that time, we raised some [indiscernible] 33, have the supplemental.

And what happened since then is the rates stay higher for longer, portfolio is doing extremely well and [indiscernible]. We’ve generated terrific earnings, record earnings for four quarters in a row. And so what you — what our shareholders would enjoy is growing supplemental in a base that was more than adequately covered. And so we wanted to think hard. We don’t — we are not just complacent with that success. One of the think hard about, do we have the balance right and we looked at our peers and their payout ratios, and we did a lot of work around our portfolio incentivized as you would expect us to, as rates drop, and making some thoughtful assumptions about credit performance. Do we have a cushion to raise the dividend further? And we felt really comfortable that even in a lower rate environment and making some appropriate assumptions around credit quality that we have more than enough cushion to raise the dividend an additional $0.02 a share.

And so we did that. Naturally, it’s not — this isn’t complicated. We invest in floating rate assets. If rates come down, earnings are going to go down. Rates went up, earnings went up. And shareholders should understand that. It’s some fundamentals investing in a BDC or selling BDC like ours. But what we would expect over time is if rates come down, we tend to look at the forward curve. We feel very comfortable continuing to earn our base dividend but we’re putting more of our dividend in the base and the supplemental will be lower if rates come down. And I think that’s a cushion as that supplemental. We just put up $0.51 a share. We raised the base of $0.37 a share. There is plenty of cushion there. And so we felt really comfortable. So to fundamentally answer your question, we looked at it holistically.

We’re going to just keep doing exactly what we’re doing. We feel really confident in our portfolio. We don’t need to change any levers, we will continue to do what we had, stay in our target leverage range, so would like to tweak that higher, continue to invest in some of our specialty finance verticals, those are accretive, especially in the lower rate environment. But fundamentally, we just continue to deliver great credit performance, and we feel good about the new dividend model.

Casey Alexander: Thank you.

Operator: Thank you. Our next question today is coming from Erik Zwick from Hovde Group. Your line is now live.

Eric Zwick: Thanks. Good morning, everyone. I wanted to start first with a question on the pipeline, and I know in the prepared comments, you mentioned that activity has been kind of seasonally slow to start, but not out of the range of normal. I’m just curious, as you look at the pipeline today, what is like in terms of the mix of new versus add on opportunities and whether also you’re seeing any commonalities in the kind of themes in terms of industries or type of companies that are in the pipeline look attractive today.

Craig Packer: Sure. It’s a mix, new opportunities, add-ons, refinancings, it’s a mix. I would tell you that it’s my hope expectation that at some point this year, we’ll see a significant pickup in new buyouts, new buyout activity remains moderate. And I think that, that should pick up dividend generally a more stable rate environment for the economy, sponsors have [indiscernible] capital to deploy, and they’re really have an imperative to return capital to their LPs and that should reflect itself in selling companies that will result in new financings. So I was hopeful we might see that starting in the first quarter, seeing some, but I wouldn’t say it’s a lower [indiscernible], but at some point this year, I think we will. So it’s a healthy mix.

At some point I think it will be more skewed to new buyout activity. There are some of those, but it’s not — I wouldn’t call it robust. I would say it’s sort of a reasonable environment that I would expect to increase over time.

Eric Zwick: Thanks. And next is looking at the — your common equity portfolio continues to grow in both dollar terms and as a percentage of total assets. How are you thinking about these investments in terms of the overall concentration and what is your inclination to realize some of the embedded gains in over what potential time frame?

Craig Packer: Sure. So look, I think that for shareholders that are less familiar with our company, while technically, all those investments you’re referring to are common equity investments, the vast majority of them are equity investments in specialty finance verticals. Essentially, their portfolio companies for OBDC where the underlying assets are pools of typically first [indiscernible] secured loans. And so the credit characteristic of the vast majority of our common equity more than half of it is an income stream, it’s a dividend stream of a diversified portfolio, credit loans underwritten by management teams and companies with deep expertise in the domain that they’re investing in. So again, for those of you who are newer, examples, [indiscernible] to their asset-base.

Lending business, this season, which is our life insurance settlements business, [indiscernible], which is our rail and aircraft business. These are all essentially portfolio companies that have very diverse pools of assets that generate income. And we are an equity owner, but we are getting an economic very consistent, predictable and growing income stream that we think will generate generally double-digit ROEs. And we have been building each of these, very sort indication of as methodic way. And in addition to that income stream, if our teams do a good job We also have an asset and equity — investment and asset is valuable and be valuable to us, valuable to others and we are creating enterprise value through our ownership stake in those business.

We’ve grown that part of our portfolio. We going to continue to do so, but it would be sort of off key of it to think of that as a common equity investment. From an account standpoint, it certainly is. But from our standpoint, it’s really a pool of assets that generate income to us and that as we invest more, we will earn more. No plans to realize on any of that. We do have a much smaller number of either equity co-investments, we have a couple of positions, I mentioned PLI a minute ago, where we took over a business, but the combination of like what [indiscernible] pure equity is like 2% or 3%. It’s really de minimus enormous. So I think this has been a powerful return generator. It could be a long-term income long-term gain for OBDC, and we’ll continue to do so, but I would urge shareholders to spend a minute to understanding it and come away, really happy with it.

When we did our Investor Day last year, we did a whole section on this. I think all of that is still available on our website. So again, if you’re newer, please take a listen. We have e-mail us if you’re not sure how to get a hold of it. We’ve come away not really, but I would go excited about what we’re building in some of these specialty verticals. That’s a helpful explanation. And last one for me. Just looking at Slide 13, there was about a $100 million increase in the portfolio companies rated either 4 or 5. So wondering if you could talk a little bit about the recent developments at those companies that drove downgrades during the quarter. Answer

Craig Packer: Yes. We — I alluded to this on the call, our overall percentage rate is 3%, 4%, 5%, which crosses underperformance stayed the same. But I made a point to point out on the call that we did have an increase midst those 3%, 4%, million the fourth the 4%, 5% category. We don’t put out individual ratings disclosure on you’ve seen, but you’ll note we certainly have a couple of names on nonaccrual and so those — one of the movers was a not a cool name. It was one of our more significant marks down this quarter. So I wouldn’t, what I would offer you is at this point in the cycle, given how the rates are, we had expected and we mentioned it again on this call and I mentioned it pretty consistently on our earnings calls that we would expect to have a few credit issues, just given the magnitude of the rate move.

And so couple of those downgrades were reflected by the press that have been performing well above expectations combined with higher debt burden starting cash off to them. But what I would say is, the fact that the 3%, 4%, 5% as a grouping stayed stable, essentially, that’s our loss list because our losses have stayed stable. We’re not adding new names of concern. There’s really just less than a handful of names that have been a concern for a year, and that concern is growing as the, their credit problems continue a faster and a high rate environment. So that’s what that is. I don’t want to minimize it. These are the areas on — both time on with our workout team and hope that we can reverse course on a couple of these, but a concern. But again, you’re talking about the overall portfolio, 1.7% of the portfolio in aggregate.

So it’s a very small role of a few names that we’re going to continue to spend a lot of time on.

Eric Zwick: I appreciate the answers, Craig. Thanks for taking my questions, sir.

Craig Packer: Great. Thank you.

Operator: [Operator Instructions] Our next question is coming from Paul Johnson of KBW. Your line is now live.

Paul Johnson: Yes, good morning. Thanks for taking my questions. Kind of looking just on fee income going forward. Obviously, it was a very active quarter for you guys, but a slower year overall, I mean, $16 million or so of fee income on a $13 billion portfolio. I mean, do you think in the relatively near-term, maybe over this year, there’s potential to generate some fairly meaningful fee on there to offset some of the potential decline from rates?

Jonathan Lamm: Yes, this quarter, we had $1 billion of sales and repayments and we have some fair amount of prepayment related income, as we said. That was some of the driver of the earnings and I think that you can certainly expect relative to last year, where there was very muted activity, an increase and for some of that fee income to represent an offset to the rates. Depending on those rate moves, will it be dollar for dollar, certainly, we couldn’t say depending on the magnitude of those rate moves. But certainly, a pickup in that activity will in overall activity will mute or dampen the decline in income from rates.

Craig Packer: And I hope at some point, I talked about a role where there’s a real pickup in M&A activity and that now role, it would stand a reason that we see a meaningful pickup in fees as well as accretion. So I expect it to happen since the number — it’s a little bit better this quarter, but it’s been sort of frustratingly low. I expect to happen at some point. I don’t want to not necessarily saying it will happen first quarter either, but at some point in a much more robust M&A environment, it should pick up myself.

Paul Johnson: Thanks. And I guess as the leveraged loan market starts to come back, there’s more syndicated activity? I mean, did you expect to potentially see some of the deals that are in the pipeline today, potentially flip over to the delinquent [ph] markets?