Our next guest is pretty bullish on the regionals for 2026. Erica Ngerian, UBS senior equity research analyst focusing on the large cap banks joins us this morning. Erica, happy Friday.Good to see you. >> Good to see you. >> I was going to ask you whether or not the environment can get any better, but I think you probably think it can.>> Look, I mean, especially for the regional banks, right. They have really suffered from all of the market share loss and direct lending to the non-banks. And last Friday, th ...

KKR anticipates a boom in European asset-backed debt markets, following an acceleration in direct lending and deal making across the region https://t.co/fsBKHyoy4s ...

Financial Data and Key Metrics Changes - Blue Owl Capital Corporation reported adjusted net investment income (NII) per share of $0.36, down from $0.40 in the previous quarter, reflecting lower non-recurring income [5][19] - The net asset value (NAV) per share was $14.89, a decline of $0.14 from the prior quarter, but has increased over 4% since inception [6][19] - Total portfolio investments exceeded $17 billion, with total net assets nearing $8 billion and outstanding debt approximately $9.5 billion [19] Business Line Data and Key Metrics Changes - The company saw originations of $1.3 billion and fundings of $1.1 billion during the quarter, with repayments at $797 million, resulting in a net leverage of 1.22 times [11][19] - Approximately 40% of the originations were add-ons, indicating strong support for existing borrowers [11] - The average hold size for new direct lending deals increased from $200 million in 2021 to roughly $350 million in 2025 [12] Market Data and Key Metrics Changes - The average revenue and EBITDA of portfolio companies grew to over $1 billion and $229 million, respectively, nearly double the levels from four years ago [14] - The non-accrual rate remained low at 1.3%, consistent with historical averages, despite a slight increase due to the addition of a watchlist position [13] Company Strategy and Development Direction - The merger with OBDC II is expected to create significant value for shareholders, adding nearly $1 billion in net assets and enhancing the portfolio's scale and diversity [10][17] - The company focuses on direct lending, primarily making senior-secured loans, which allows for better control and transparency in credit assessments [9] - The strategy emphasizes larger, recession-resistant businesses, avoiding more cyclical sectors like energy and retail [14] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the portfolio's strength, citing solid fundamentals and disciplined underwriting practices [25] - The company anticipates that earnings and dividends will adjust in response to declining base rates, but remains focused on maintaining a sustainable dividend policy [24][39] - There are expectations for a potential normalization of spreads in the direct lending market, which could enhance returns [72] Other Important Information - The board declared a fourth-quarter base dividend of $0.37, to be paid on January 15, 2026 [19] - The company has a robust liquidity position with over $3 billion in cash and capacity on facilities, exceeding unfunded commitments [20] Q&A Session Summary Question: What is driving the higher non-accruals in OBDC II? - Management explained that the higher non-accrual rates are due to larger names in OBDC II, which operates under lower leverage constraints, but the impact on overall credit statistics is minimal [27][28] Question: What steps are being taken to improve stock valuation? - Management highlighted ongoing efforts to simplify the BDC portfolio and noted that the stock is yielding over 11%, which is not aligned with performance [31][33] Question: What are the expectations for rate cuts and their impact on dividends? - Management indicated that they do not predict rates but will adjust dividends based on the portfolio's earnings power in a lower rate environment [38][39] Question: How will the merger affect ROE accretion? - Management expects to achieve most operational synergies quickly post-merger, with capital structure-related synergies anticipated in 2026 [86] Question: What is the outlook for originations and M&A activity? - Management noted a significant pickup in activity levels, particularly in sell-side M&A opportunities, which typically yield greater upfront fees [47]

Core Viewpoint - The recent default of First Brands Group does not indicate increased risk for the traditional direct lending market, according to Fitch Ratings [1] Group 1: Debt Exposure and Market Impact - First Brands' debt is primarily linked to broadly syndicated loans (BSL), not direct lending, with the BSL market having greater exposure to the company's restructuring [2] - The median exposure across 330 Fitch-rated reinvesting U.S. BSL CLOs was 0.4%, increasing to 0.9% for 48 CLOs that completed their reinvestment periods [2] Group 2: Bankruptcy and Liabilities - At the time of bankruptcy, First Brands had nearly USD 5 billion in first-lien term loans and over USD 500 million in second-lien term loans, underwritten and syndicated by investment banks [3] - Traditional direct lending typically involves private negotiations without intermediaries, contrasting with First Brands' situation [3] Group 3: Loan Classification - A USD 250 million loan issued earlier this year should be classified as a private placement of a broadly syndicated loan rather than a private credit facility [4] - First Brands' status as a private company does not change the classification of its debt as syndicated [4] Group 4: Financial Strain Factors - Fitch attributed First Brands' financial difficulties to extensive off-balance sheet financing, including receivables factoring and inventory reverse-factoring [5] - These liabilities differ from traditional direct lending, which is typically on-balance sheet and secured by first-ranking claims over borrower assets [5] Group 5: Default Rates and Future Outlook - The private credit default rate was 5.2% in August, unchanged from the previous month but up from 4.6% in December 2024 [6] - Fitch anticipates that easing interest rates may reduce cash flow pressure on private issuers, potentially leading to lower default rates in future periods [6]

Private Credit Billionaire Lawrence Golub: Why Direct Lending Is Not In A Bubble https://t.co/0KN7w70c2w ...

Direct Lending Market - CVC's credit unit has raised €10.4 billion for European direct lending [1]

Core Insights - Bennelong Funds Management has signed a memorandum of understanding (MOU) with Monroe Capital to expand its distribution in Australia and New Zealand [1] - Monroe Capital is a USD$21.6 billion asset manager specializing in diversified private credit solutions [1] - The firm focuses on US lower middle market direct lending to institutional and high-net-worth investors [1]

Federal Reserve Policy & Interest Rates - The market has fully priced in a 100% probability of the Federal Reserve cutting rates by 25 basis points at each of the next three meetings this year, totaling a 75 basis points reduction [2] - The market may be slightly disappointed if the Fed does not cut by 50 basis points [2] - The Fed is implicitly accepting a 3% inflation rate, despite aiming for 2%, and is prioritizing jobs data, which is currently weak, as the reason for cutting rates [3] - The expectation is that the Fed funds rate will eventually be brought down to 3% with cuts in every successive meeting [4] Economic Outlook - There is very little to no risk of recession or stagflation, with a 3% GDP print expected for the current quarter, following a 33% print last quarter [3][4] - Equity markets and credit spreads, currently at 300 in the high yield market, indicate growth and negate the possibility of recession or stagflation [5] - A significant stimulus package, along with productivity gains from AI, is expected to further boost the economy [6] - One trillion is expected to be spent in data centers [7] Credit Market Opportunities - Public market spreads have tightened, and rates have come down, but new issuance provides opportunities to gain alpha [8] - Direct lending is experiencing its most prolific period, with seven deals approved through the investment committee in the last week [9] - Lower interest rates are expected to spur more transactions, refinancings, and new issue activity for private equity [10] - Asset-based lending, particularly in financing property, plant, and equipment in the AI sector, offers attractive risk-adjusted returns with 60% LTVs and potential returns in the low to mid-teens [12][13] - Private credit offers a 500 basis point incremental spread pickup compared to public credit [13]

Interest Rate Environment & Economic Outlook - The company believes higher interest rates are likely to persist for an extended period [3][6] - The company's portfolio companies are experiencing double-digit growth, indicating a sound and solid economy [5] - The company expresses confidence in the Fed's ability to navigate the rate environment [6] - The company views current market volatility and concerns about Fed independence as "noise," emphasizing the underlying strength of the economy [7][8][12] Private Markets & Retirement Plans - The company acknowledges a generational shift towards increased accessibility of private investments, including potential inclusion in 401(k) plans [2][13][14] - The company advocates for a cautious approach to expanding private investment access, emphasizing the importance of walking before running [14] - The company highlights the historical outperformance of private lending compared to liquid alternatives [16] - The company stresses the need for robust disclosure and regulation in private markets to mitigate risks such as fraud [17] - The company cautions against a potential flood of retail capital into private equity, which could create opportunities for existing firms to exit less desirable investments at the expense of retail investors [22][23] - The company suggests starting with lower volatility, safer private investment options like private credit and real assets, emphasizing a prudent and well-regulated approach [23][24]

Financial Data and Key Metrics Changes - The company achieved a return on equity (ROE) of 10.6%, marking the twelfth consecutive quarter of double-digit ROE, based on adjusted net investment income (NII) per share of $0.40, reflecting strong earnings power [5][21] - The net asset value (NAV) per share was $15.03, down $0.11 from the prior quarter [6][21] - Adjusted NII per share increased by $0.01 compared to the prior quarter, driven by elevated one-time repayment income totaling $0.05 per share [21][22] - The company declared a supplemental dividend of $0.02 and a base dividend of $0.37 for the third quarter [22] Business Line Data and Key Metrics Changes - Approximately $1.1 billion of new investment commitments were deployed in the second quarter, with $906 million of fundings [12] - The debt portfolio maintained a conservative loan-to-value (LTV) ratio of 42% on average, supporting robust recoveries [16] - Revenue and EBITDA for portfolio borrowers increased by mid to high single digits year-over-year, with interest coverage rising to 1.9 times [17] Market Data and Key Metrics Changes - The deal environment in 2025 has been challenging, with muted M&A activity impacting overall deal flow [8] - The company noted a stabilization in spread pressure experienced last year, with direct lending spreads remaining tight but commanding a healthy premium over the broadly syndicated loan market [26][60] Company Strategy and Development Direction - The company is expanding into complementary strategies, including alternative credit and digital infrastructure, to access new investment opportunities [10][26] - A cross-platform equipment leasing joint venture was formed to enhance diversification and expand reach in new investment areas [10][15] - The company aims to maintain strong risk-adjusted returns regardless of economic conditions, supported by a defensively constructed portfolio and disciplined underwriting [11][26] Management's Comments on Operating Environment and Future Outlook - Management expressed cautious optimism about a potential rebound in deal activity in the second half of the year, citing increased engagement with private equity sponsors [28][45] - The company does not foresee significant stress in its portfolio, with a stable watch list and no material increase in amendment activity [18][66] - Management believes that the current economic environment is resilient, with portfolio companies continuing to perform well despite broader economic concerns [66] Other Important Information - The company ended the quarter with over $4 billion in total cash and capacity on its facilities, providing significant liquidity to invest in new opportunities [24] - The non-accrual rate was reported at 0.7% at fair value and 1.6% at cost, reflecting a slight increase due to one small position on the watch list [18] Q&A Session Summary Question: Where are we in terms of realizing synergies from the merger with OBD? - Management indicated that operational expense synergies have been realized, while financing synergies are expected to materialize over the next year [32][34] Question: Can you quantify how much of year-to-date originations have come from new business lines? - Management noted that the platform has expanded into new lines of business, but the impact on originations is still modest as they are just beginning to see deal flow [36][38] Question: What types of deals are being seen in the current environment? - Management highlighted a mix of public-to-private activity, refinancing, and add-on acquisition financing as potential deal types [44][46] Question: How does the company view leverage going forward? - Management stated that they are comfortable with current leverage levels and expect to maintain them unless deal activity picks up significantly [48] Question: What is the outlook for spreads in the current market? - Management believes spreads have troughed and may widen in the future, depending on market conditions [68] Question: How does the company plan to scale the equipment leasing business? - Management emphasized that while the equipment finance joint venture may not be a massive investment, it represents a diversification strategy that can create consistent returns [75][76]