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Edited Transcript of ORCC.N earnings conference call or presentation 31-Oct-19 1:00pm GMT

Q3 2019 Owl Rock Capital Corp Earnings Call

Nov 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Owl Rock Capital Corp earnings conference call or presentation Thursday, October 31, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alan J. Kirshenbaum

Owl Rock Capital Corporation - COO, CFO & Director

* Craig W. Packer

Owl Rock Capital Corporation - President, CEO & Director

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Conference Call Participants

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* Casey Jay Alexander

Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst

* Christopher John York

JMP Securities LLC, Research Division - MD & Senior Research Analyst

* Finian Patrick O'Shea

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Kenneth S. Lee

RBC Capital Markets, Research Division - VP of Equity Research

* Robert James Dodd

Raymond James & Associates, Inc., Research Division - Research Analyst

* Ryan Patrick Lynch

Keefe, Bruyette, & Woods, Inc., Research Division - MD

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Presentation

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Operator [1]

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Good morning, and welcome to Owl Rock Corporation's Third Quarter 2019 Earnings Call.

I would like to remind our listeners that remarks made during the call may contain forward-looking statements. Forward-looking statements are not guarantees of future 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 the forward-looking statements as a result of a number of factors, including those described from time to time in Owl Rock Capital Corporation's filings with the Securities and Exchange Commission. The company assumes no obligation to update any forward-looking statements.

As a reminder, this call is being recorded for replay purposes. Yesterday, the company issued its earnings press release and posted an earnings presentation for the third quarter ended September 30, 2019. This presentation should be reviewed in conjunction with the company's Form 10-Q filed on October 30 with the SEC. We will refer to the earnings presentation throughout the call today, so please have that presentation available to you. As a reminder, the earnings presentation is available on our website.

I will now turn the call over to Craig Packer, Chief Executive Officer of Owl Rock Capital Corporation.

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Craig W. Packer, Owl Rock Capital Corporation - President, CEO & Director [2]

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Thank you, operator. Good morning, everyone, and thank you for joining us today for our third quarter earnings call. This is Craig Packer, and I'm CEO of Owl Rock Capital Corporation and a Co-Founder of Owl Rock Capital Partners. Joining me today is Alan Kirshenbaum, our Chief Financial Officer and Chief Operating Officer. I'd also like to introduce Dana Sclafani who has recently joined the Owl Rock as Head of Investor Relations.

As this is our second public earnings call since our IPO in July, on behalf of Alan, Dana and myself, I'd like to again welcome our new shareholders as well as members of the research community who have been following our story. I'd like to start by highlighting our third quarter results before discussing in more detail our investing activities in the quarter. Alan will then provide more detail on our financial results and an update on our financing activities before I return with some closing comments.

To begin, today, we are pleased to report another strong quarter of results. Net investment income per share was $0.36 for the quarter. We saw robust origination activity, and in addition, credit quality across the portfolio remains strong with no investments on nonaccrual. We ended the quarter with net asset value per share of $15.22. Our Board has declared a fourth quarter dividend of $0.31 per share. Our Board had also previously declared a $0.04 per share special dividend for the fourth quarter, which is the second of our previously declared 6 special dividends, which will continue to be distributed throughout 2020. Our annualized dividend yield for the quarter was 8.7%. Our net investment income covered our dividend this quarter by approximately 110%.

In addition to these results, we were also pleased this month to access the public investment-grade bond market for the second time when we completed a $425 million senior unsecured note offering at a very attractive rate. Alan will cover the liability side of our business in more detail later in the call.

As we get into the detail of our investment activity, I'd like to remind everyone of our investment strategy and what we believe are a few of the key differentiators of the Owl Rock platform as we believe these advantages were again on display this quarter. We remain a lender focused on the upper middle market and on primarily sponsor-backed companies. We prefer upper-middle-market companies because we believe larger businesses are often more durable and better able to withstand economic cycles or other changes they encounter. We prefer sponsor-backed companies where private equity firms provide substantial capital, expertise and oversight to the businesses, which benefit our investments as well. To serve this market, we believe our scale is very important, so we've assembled a significant pool of capital and a large, high-quality investment team that complements our close relationships with a large number of leading financial sponsors.

We have continued to see the benefits of this strategy. The third quarter was very active from an originations perspective for ORCC with $1.5 billion of new investment commitments, $1.3 billion of new investment fundings and $1.1 billion of net funded investment activity, which was net of $215 million of sales and repayments. While our investing was spread throughout the quarter, as the quarter wore on, we saw some softness in the syndicated leveraged finance markets, resulting in more sponsors looking to direct lenders like Owl Rock to get deals done with certainty. Because of our scale and available capital, we are a beneficiary of this trend as we we're able to commit to high-quality deals in size. As a result, our portfolio grew by quarter end to $8.3 billion of high-quality, directly originated senior secured floating rate loans.

The overall Owl Rock platform across our 4 managed funds saw strong origination this quarter, which helped drive ORCC investment activity. Notably, we executed several larger transactions. The top 5 investments made by the Owl Rock platform this quarter totaled nearly $1.4 billion of Owl Rock commitments at an average investment size of roughly $280 million across our funds. This type of deal activity further validates our business model. We believe sponsors want to work with us and trust we can get there on their largest and most strategically important deals, and there's a limited number of credit managers who have the ability to commit to and hold deals of this size.

Another benefit of the strong origination activity this quarter was that we were able to make good progress towards moving back towards our long-term target 0.75x leverage ratio, ending the quarter with debt-to-EBITDA -- debt-to-equity, excuse me, of 0.39x. I would highlight that while we had an active quarter, this isn't consistent with other previous strong origination quarters, and there has been no change to our overall strategy as we continue to be disciplined in the opportunities we pursue and close on a small percentage of our deal flow.

We remain highly focused on the quality of the book we are building. The ORCC portfolio ended the quarter with approximately 80% first-lien positions. We continue to focus on large, stable, recession-resistant businesses. The weighted average EBITDA of our borrowers was approximately $77 million at quarter end, remaining squarely on the upper end of middle-market companies. Diversification is important as well, and our book now consists of 96 portfolio companies across 27 industries with no industry accounting for more than 10% of the portfolio and no individual investment greater than 3% of the fully invested portfolio. Our top 10 positions now represent 25% of the current portfolio.

As we've highlighted previously, we like unitranche loans due to their attractive spreads and dollar-one attachment point, and we believe we are a leader in the space. We added 10 new borrowers this quarter and provided unitranche loans to 4 of them at an average facility size of roughly $500 million. This is in line with trends in the broader market, which saw unitranche volumes hit a record high in the third quarter. Owl Rock serves as a lead arranger or administrative agent on all 4 of these facilities, all of which priced at attractive spreads, included a financial maintenance covenants and were backed by high-quality private equity firms. One example was our loan for Integrity Marketing, a leading distributor of life and health insurance focused on serving senior citizens in which

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we were lead arranger for this $945 million unitranche, the largest unitranche Owl Rock has led to date and one of the largest ever completed.

While new portfolio company activity was strong, we also continue to see the growing benefit of incumbency as we provided incremental capital to 7 of our portfolio companies this quarter. In addition, we saw repeat activity with 6 sponsors. We believe that our top sponsor relationships will be a driving force of our portfolio growth and sustainability. We are pleased to have over 50 sponsors represented in our portfolio.

As another byproduct of the market environment, we saw an increased number of second-lien investment opportunities. As I noted before, with markets becoming more volatile, sponsors focused on working with direct lenders for second-lien tranches in order to provide increased certainty of execution. In that vein, we closed on 3 second-lien investments for $430 million in aggregate size. We continue to have a high bar for second-lien investments, and we'll only pursue them for the right credits. For second liens, in particular, we remain focused on large recession-resistant companies who are leaders in their field and who operate in sectors with highly stable end markets.

On this note, one investment we'd like to highlight, Pregis, is a name we have already been invested in and are excited to continue to work with. It's a well-regarded name in the leveraged finance space. Pregis is a provider of protective packaging equipment and the related consumable materials with a razor-razor blade business model. The company benefits from a large installed base of machines at customer sites, which generate recurring revenue from the sell-through of consumable film as well as strong industry growth trends, driven by e-commerce and a shift toward inflatable air cushion packaging. We've been invested in this company since July of 2018 and committed to a second-lien loan as part of acquisition financing being put in place by the then-owner, Olympus Partners. When Pregis was sold to Warburg Pincus this past August, we were pleased to support Warburg's acquisition by being sole lead arranger and administrative agent on the $215 million second-lien term loan.

While we saw more dollars invested in second-lien deals this quarter than the previous couple of quarters, our overall second-lien exposure across the portfolio remains at only 19% with the balance in first-lien and unitranche term loans.

I wanted to mention one other investment. As you may notice in one of our footnotes, we have committed $50 million to a new portfolio company called Wingspire. Wingspire is an independent direct lender, focused on providing asset-based commercial finance loans to U.S. middle-market borrowers. We think the ABL space is attractive because when underwritten well, the assets underlying the loan provide significant credit protection. While some of our peers have acquired ABL businesses, after looking at acquisition opportunities over the past few years, we found a terrific team with significant experience in the commercial finance industry, we decided to back them and build the business organically instead. Wingspire formally launched in September, and while it is small today, we think it is an attractive growth investment for ORCC that will benefit our shareholders over time.

Moving on to repayments. As some of you may recall, on our last call, we spent a good amount of time discussing repayments. We noted then that the pace of our repayments is hard to predict as the timing of our repayment event is idiosyncratic to the borrower. The pace of repayments was slower in this quarter than last quarter. In the third quarter, we saw $215 million of repayments and sales as 4 positions were fully realized. I'd reiterate from our last call, over time, we do expect our overall pace of repayments to increase as our portfolio ages. We'll just take some time to get to that more regular repayment pace.

Another trend this quarter was the continued decline in LIBOR. In line with the broader market, we saw some impact to our portfolio as a result of this move. The asset yield of our portfolio was 8.9% for the quarter versus 9.1% in the second quarter. This drop reflects the decrease in LIBOR, which was partially offset by a 10 basis point increase in our average spread. As you'll see in our earnings presentation on Page 5, the weighted average spread of our new investments increased to 6.6%, primarily reflecting the mix shift this quarter. This increase is up 70 basis points from last quarter and is our third consecutive quarterly increase in spread.

In terms of the broader market, we saw some modest spread widening this quarter but still expect it to take some time for the market to fully recoup the drop in rates. Naturally, we hope to offset some of the decline in LIBOR with increasing spreads on our first-lien investments in particular, and recent market volatility has been helpful in this regard.

While this has been a busy quarter for us, we remain steadfastly focused on credit quality. As has been the case previously, we continue to have no investments on nonaccrual status and, since our inception in 2016, have not had any principal losses or defaults. Of course, given where we are in the credit cycle, we are closely monitoring our portfolio of companies for any signs of change in credit performance. We continue to see solid performance across our borrowers with growth in line with a modestly growing U.S. economy, which reflects our focus on recession-resistant sectors that we believe helps mitigate economic cyclicality.

As you'll see on Page 13 of the earnings presentation, across our 5-point internal performance rating scale, our portfolio mix has remained consistent with that of previous quarters. Overall, we're very pleased with our investment activity and portfolio performance this quarter.

I'll now turn the presentation over to Alan to cover additional detail on our financings and our quarterly results.

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Alan J. Kirshenbaum, Owl Rock Capital Corporation - COO, CFO & Director [3]

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Thank you, Craig. Good morning, everyone. To start off on Slide 6 of our earnings presentation, you can see that we ended the second quarter with total portfolio investments of $8.3 billion, outstanding debt of $2.5 billion and total net assets of $5.9 billion. Our net asset value was $15.22 per share as of September 30 as compared to $15.28 per share as of June 30. Our dividend for the third quarter was $0.31 per share plus a $0.02 per share special dividend. And our net investment income was $0.36 per share, overearning our dividend as expected.

On the next slide, Slide 7, you can see total investment income for the third quarter was $188 million. This is up $12 million from the previous quarter or approximately 7%. We should generally expect to continue to see revenue increases for the next several quarters as we lag back into leverage, building up to approximately $10 billion in total investments when the portfolio is fully invested.

As for expenses, total expenses, net of our fee waivers, for the third quarter was $50 million. This is down $6.8 million from the previous quarter or about 12%, which was primarily due to lower interest expense in connection with our deleveraging in June from our final capital call just prior to our IPO.

Our net asset value saw a decline of $0.06 per share this quarter. You can see an average on Slide 8 of our earnings presentation. As you can see on this slide, the net asset value decline was primarily driven by: one, mark-to-markets on our investments from changes in spreads quarter over quarter; and two, IPO costs. This was partially offset by overearning our dividend this quarter.

Moving on to our dividend policy and a reminder of how we set up our IPO structure. If you recall, we have an industry-low cost structure. Since our inception, we have only charged a 75 basis point management fee and 0 incentive fee. Although our management fee post-IPO is 1.5% and our incentive fee is 17.5%, we chose to waive this best-in-class public BDC fee structure and keep, for 5 quarters after our IPO, our industry-low 75 basis point management fee and 0 incentive fee. The way you will see this flow through the income statement is our management and incentive fee expense lines in our 10-Q will represent the 1.5% and 17.5% fee structure. And the waiver line, effectively a contra-expense, shown just under our total operating expenses on our 10-Q, reflects the portion of our fees that we are waiving. For the third quarter, we waived $31.7 million of fees. We are passing this fee waiver on to our shareholders effectively in the form of special dividend payments, which I'll remind you all about in a moment.

For the fourth quarter of 2019, our Board approved a dividend of $0.31 per share, which we think of as our long-term dividend. As a reminder, our Board set this dividend with a long-term view at a level which we felt was a very achievable, conservative dividend level. In connection with our IPO, our Board also approved a series of 6 consecutive quarterly special dividends. You can see a picture of our dividend structure for the next 1.5 years on Slide 15 of the earnings presentation.

Our special dividends, effectively, the fee waiver I just mentioned, is the shaded portion of each bar at the top of this slide. These started in the third quarter of 2019 and run through and include the fourth quarter of 2020. For the fourth quarter of 2019, the special dividend is $0.04 per share, and for each quarter next year in 2020, the special dividend is $0.08 per share per quarter. So in 2020 alone, total special dividends add up to $0.32 per share. This is effectively an additional full quarter's dividend that we're paying throughout 2020. As you can see on this slide, we provided ourselves a ramp with our special dividends from the third quarter of 2019 through the first quarter of 2020 as we ramp back to our target leverage ratio. Again, all of these special dividends have already been approved by our Board of Directors for shareholders of record as of the last day of each respective quarter.

Now to talk about our financing landscape and liquidity for a moment. As of September 30, our quarter-end debt-to-equity ratio was 0.39x. So we are on track and well on our way to lag back into our target leverage of 0.75x debt to equity. On our earnings call last quarter, we said we thought it could take 9 to 12 months, and we're right on track with that. So we think 6 to 9 months left from here until we're fully invested. All of this is also in line with our special dividend ramp that I just outlined.

As it relates to our financings, we were very active again this quarter. You can see an overview of all of our financings on Slide 14 of the earnings presentation. To sum up our activity here, we did another unsecured public bond issuance in October right after quarter end. We closed a new SPV drop-down financing facility during the quarter, and we upsized our revolver to $1.2 billion. Our unsecured public bond issuance was very well received by the market and significantly oversubscribed. From our April issuance to our October issuance, we tightened our spread from 312.5 basis points all the way down to 260 basis points, which is over 50 basis points of tightening, and we would expect future issuances to continue to tighten.

This October issuance, which we refer to as our 2025 notes, priced at 4% fixed, which is lower by 125 basis points from the 5.25% fixed coupon in our April issuance, which we refer to as our 2024 notes. Our average dated interest rate on debt outstanding was 5.1% for the third quarter compared to 5% for the second quarter. As we guided on our last call, we would expect our cost of debt to go up a little in the short term, but we expect, over time, it will then come down as we continue to more efficiently access the unsecured debt markets. As a reminder, we had to terminate our subscription line financing facility in connection with our IPO, which was our most cost-efficient financing.

While I have noted previously that our philosophy is to match interest rates, we have chosen to wait in swapping our 2025 notes. What we saw when we priced out the swaps for this recent issuance is that it was significantly more expensive than what we expected to see. We would have had to pay a significant premium due to the market conditions, which would have increased our interest rate from 4% to approximately 4.6%. So we think it is better for our shareholders to retain the flexibility at this point in time and hold off swapping to floating.

Also keep in mind, our secured financings are floating rate. So this fixed-rate bond issuance represents a very small portion of our overall financing landscape. We will continue to monitor all of this and see if the LIBOR and swap rate negative carry corrects itself in the future. If these unusual market conditions last for an extended amount of time and there is a negative carry to enter into swaps in the future bond issuances, you could end up seeing a portion of the right side of our balance sheet [as] fixed rate.

So to wrap up with a few other items and reminders. Our annualized dividend yield for the third quarter was 8.7%, which is broken out as $0.31 per share dividend, representing approximately 8.2% yield this quarter; and our $0.02 per share dividend, representing approximately 50 basis points of yield this quarter, right on track with our expectations. And since we ended the quarter a little ahead of where we thought we would from a total investments perspective, that gives us some tailwinds to start the fourth quarter. We priced another unsecured public bond issuance that was very well received by the markets again. We will continue to focus on issuing unsecured debt in the future, which could be 50% or more of the right side of our balance sheet over time. With future issuances, we expect to continue to price more efficiently, which will improve our overall cost of finance.

In connection with our IPO, we instituted a 10b5-1 buyback program. As a refresher, this program went into effect shortly after our IPO and is a programmatic plan. It's not discretionary, and it's not subject to blackout windows. The plan is administered by Goldman Sachs and starts buying a share of the average daily trading volume below NAV. The size of the plan is $150 million, and it is for an initial 18-month term. We take this buyback plan into consideration when we review our target leverage and liquidity profile. Since the program went into effect, we have not bought back any shares as our trading level has been above our net asset value and IPO price.

Thank you all very much for your support and for participating in today's call. Craig, back to you.

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Craig W. Packer, Owl Rock Capital Corporation - President, CEO & Director [4]

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Thanks, Alan. In closing, I thought I would touch on the current direct lending market environment. As I noted before, as the third quarter wore on, the syndicated leveraged finance markets weakened, and we saw some benefits from this weakness. This dynamic has continued through the end of October. As we look at the markets today, conditions remain more challenging in the syndicated leveraged finance space than those in the first half of the year. While it's too soon to predict the impact this may have on Q4 results, should these conditions hold, we believe we would benefit from a more favorable investing environment as we could see more high-quality opportunities shift away from the syndicated market to the direct lending market while also seeing the market as a whole move towards improved spreads and terms.

Having said that, the markets have proven resilient over the last few years, particularly with the backdrop of the central banks continuing to ease monetary policy. Regardless of the market environment, we will continue to focus on what we have done since founding Owl Rock, build up a large, high-quality funnel of investment opportunities; remain highly selective and assemble a diversified portfolio of upper-middle-market senior secured floating rate loans with an intense focus on credit selection and credit protections. We believe our scale and ability to commit significant dollars is a key differentiator as was demonstrated again this quarter.

As Alan and I have both noted, we are pleased with our results this quarter across both our origination activity and financial results and are excited to continue to deliver strong returns for our shareholders. We're proud of what we've accomplished but remain focused on maintaining our credit discipline and the overall quality of the portfolio as we look to further build on our progress. On behalf of myself, Alan and the entire Owl Rock team, I want to close by thanking everyone again for your time today and for your interest in Owl Rock. We look forward to maintaining an ongoing dialogue and keeping you apprised of our progress.

Operator, please open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Chris York with JMP Securities.

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Christopher John York, JMP Securities LLC, Research Division - MD & Senior Research Analyst [2]

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Craig, it was another strong quarter of origination production. So I'm curious, how is your ability to structure delayed-draw revolvers and term loans and then to provide certainty to sponsors for add-ons increase the demand for capital? And then alternatively, how are you managing the risk in liquidity from the unfunded commitment component of these undrawn facilities?

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Craig W. Packer, Owl Rock Capital Corporation - President, CEO & Director [3]

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Chris, it was a little hard to hear you, but I think what you were asking was how do we delay draws and revolvers and how do they help us win business essentially and how do we manage it from a liquidity standpoint. Is that what you're asking?

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Christopher John York, JMP Securities LLC, Research Division - MD & Senior Research Analyst [4]

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That's correct.

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Craig W. Packer, Owl Rock Capital Corporation - President, CEO & Director [5]

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Sure. So you hit on both of them, but for the benefit of the broader audience, particularly when we're financing a new LPO, we often get asked by a financial sponsor to provide 2 types of facilities, a revolving credit facility and, occasionally, delayed-draw facilities. Almost every company has a revolving credit facility that's to provide short-term liquidity needs to run their business for working capital movements or anything else that can occur to run the business.

Delayed-draw term facilities are used by companies to provide future financing, particularly if they expect to do acquisitions or potentially for other types of significant projects like capital expenditures, et cetera. So in the financial sponsor space where sponsors are pursuing strategies, acquiring companies and building them through acquisition, we often get asked to provide delayed-draw facilities so that the sponsor knows they've got the capacity to do that.

The size of our overall platform and the size of ORCC in particular provide us the flexibility to be able to offer those solutions, and I think it's a very helpful differentiator for what we can offer versus other financing sources. Banks in particular don't like to provide delayed-draw facilities because banks like to syndicate out their facilities and CLOs. We're the largest consumer of leveraged loans, [we] do not find it attractive to have undrawn financing commitments. So it's something that's a strength of ours and that we [offer out] in selected circumstances, taking into account all the appropriate credit considerations that you would expect.

We track carefully the amount of undrawn commitments we've made, both revolver and delayed draw. Off the top -- Alan, in a minute, can comment on exactly how much we have outstanding, but to answer your question, we take into account all of those commitments as we think about how we build the portfolio and our leverage targets to obviously account for the fact that it could all ultimately 100% get drawn. We want to make sure that even if that were to happen, we're in an extremely comparable place from a leverage and liquidity standpoint. But Alan may want to make a couple of other comments.

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Alan J. Kirshenbaum, Owl Rock Capital Corporation - COO, CFO & Director [6]

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Yes. So just to add on to that, Chris, to give you a couple of numbers. We had about 7 -- or we have about $775 million of undrawn revolvers and undrawn delayed draw term loans. We add to that the $150 million of undrawn 10b5-1 plan buyback program, that's about $825 million (sic) [$925 million] of potential demand. And we have $1.6 billion of commitments, committed financings available to us today. So that's about $800 million (sic) [$700 million], give or take, of excess. And so we try to stay ahead, and we reserve that for future originations and pipeline. So we're very comfortable there.

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Craig W. Packer, Owl Rock Capital Corporation - President, CEO & Director [7]

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And just to make one more comment on this topic. Revolving credit facilities, as I mentioned earlier, almost every company has one, and they want to keep that for a long time, typically, very consistent with the length of our term loan. Delayed draws are different. Delayed draws have a defined time. It can be as short as 3 or 6 months, almost never longer than 2 years. Typically, it's about 12 months. And so when we make those commitments, we know exactly when they will go away. And usually, we have a high degree of visibility of when they will get funded as they are intended to get funded. So we look at them a little bit differently because we can schedule out exactly when they come off and can manage new delayed draws in that context.

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Christopher John York, JMP Securities LLC, Research Division - MD & Senior Research Analyst [8]

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Great. That was a very comprehensive answer, and I appreciate all the context and color. And then you led a couple of large deals in the quarter, including Integrity, and you put some sizable positions in your portfolio in the quarter. So in light of this and then also in light of simultaneous growth at your platform, could you update us on how you are thinking about the largest single exposure you may want to put in the portfolio on an absolute basis or maybe on a percentage basis?

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Craig W. Packer, Owl Rock Capital Corporation - President, CEO & Director [9]

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Sure. So we've been very mindful that since inception, as we've been building out Owl Rock, we have been trying to position the portfolio in light of where we expect to be on a fully invested basis. As Alan mentioned in his comments, we think a fully invested portfolio at ORCC is about $10 billion (inaudible) sizes overall. Today, the largest position, GLG, is about a 3% position on a fully invested basis. And so I would expect all of our investments to be targeting 1% and 2% and only the most extremely attractive ones to be between 2% and 3%. And rarely would we do anything in excess of 3%. I don't want to say never, but I would use the GLG as a good expectation of a large position.

I'd also point out that GLG, we think, is, in particular, one of the highest-quality and lowest-risk positions in our book. It has appropriately a low spread as a result. But when we take a position of that size, you should expect that we'll have the highest conviction to put something in there. And even though in Integrity, and you raised Integrity, Integrity was a $945 million deal. We got a call from a sponsor who only wanted to work with us for reasons I won't go into. And we could have had as much as we wanted, but we didn't want to have $945 million. And so we worked with them to get to a comfortable hold, and our position in ORCC is $137 million, and across our platform, it's $328 million.

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Christopher John York, JMP Securities LLC, Research Division - MD & Senior Research Analyst [10]

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Got it. So you're -- just to be clear, you're thinking about it on a fully invested basis, so maybe using that $10 billion portfolio level?

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Craig W. Packer, Owl Rock Capital Corporation - President, CEO & Director [11]

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Yes. That's the number -- that's the denominator I would suggest you use.

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Christopher John York, JMP Securities LLC, Research Division - MD & Senior Research Analyst [12]

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Okay. And then last question is on asset sensitivity. So as you know, the interest rate environment curve -- forward curve has changed since you completed your IPO in July. And I recall that your 2-year plan may have included a flat LIBOR assumption, which is now down about 40 basis points in LIBOR since July. So your plan had ample earnings coverage in 2021, and it has many levers to pull. So should investors consider maybe tweaking any other inputs in the 2-year plan as an offset to the changes in the forward curve and likely spread income headwinds?

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Craig W. Packer, Owl Rock Capital Corporation - President, CEO & Director [13]

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I mean Alan can comment. I'm happy to comment as well. Look, we are not rate strategists. We -- well, LIBOR is going to go up and down. And we've even seen it in a short amount of time. Owl Rock's probably 3.5 years. We started LIBOR with 0. LIBOR went up. LIBOR has since declined off the peaks. It's hard for us to predict over the next 3 to 5 years exactly where LIBOR will go. Obviously, the Fed had some things to say about that yesterday, and everyone can draw their own conclusions. But I think it's a particularly tricky time to try to guess where LIBOR is going.

I think that what we said at the time of our IPO, and what I'll reiterate now, is that as LIBOR moves and as the economic conditions move, spreads move as well. When we started investing and LIBOR was 0, spreads were wider. As LIBOR went up, spreads came in. And now that LIBOR is coming back down, we are seeing the beginnings of spread widening. So I think one offset to the low rate environment will be spread widening across the market. In addition to that, as we talked about in the IPO, we think we have the opportunity to adjust our mix over time.

More -- as you know, today, 45% of our portfolio is first lien or stretch first lien. And we expect that percentage -- it's high right now, and we expect, over time, we will do more unitranche and second lien that will impact that mix and that spread, that will serve as an offset if -- at lower LIBOR. Obviously, our liability side is also floating rate. So there's offset on that side as well. I don't know, Alan, if you want to add anything to that.

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Alan J. Kirshenbaum, Owl Rock Capital Corporation - COO, CFO & Director [14]

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I agree with all of that.

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Operator [15]

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Your next question comes from Ryan Lynch with KBW.

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [16]

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The first one relates to, Craig, you mentioned there's some softness in the syndicated loan market. We've heard that as well. One of the reasons that we've heard some of the softness is in some of the perceived weaker credits, and those are the credits that are struggling the most to get done in the syndicated market. And so those are the ones that are primarily having the softness, and the higher-quality names are still getting done fairly easily. So you mentioned the softness as being -- you guys being able to step in and that being a reason for some of the higher loan volumes this quarter, potentially in the fourth quarter. So how do you square away potentially some of the weakness in that market with some of the riskier credits, at least perceived riskier credits, and meanwhile trying to maintain a very high-quality portfolio?

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Craig W. Packer, Owl Rock Capital Corporation - President, CEO & Director [17]

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Sure. I think it's a perfectly fair question. So I would sort of break it into a few pieces. There's no question that there's a strong demand for investment-grade bonds, BB bonds, strong single-B term loans. But I think that the market for single-B LBO paper is more volatile and weaker now, not just weaker credits. CLO formation has slowed. Loans have -- loan mutual funds had outflows all year long. And so there's just less technical demand for syndicated loan product. In addition, the rating agencies, I think, have become more cautious at the ratings profile they're willing to give new LBOs, with a higher percentage of deals getting B3 ratings. As you know, CLOs have pretty strict limitations of how much B3 credit they can put in their books. And so that becomes a very sensitive point. And there's additional concern if the B3 gets downgraded.

And so I don't think that the weakness is limited to just "weaker credits." I think it's any type of mid- or low single-B LBO credit will find a more difficult environment. We don't -- when I made the comment about market opportunity, when deals struggle in the market, banks become much more conservative on what they're willing to underwrite and put much more flex on their deals. And the sponsors, therefore, have a harder time getting financing, and the financing they can get is less attractive. And so it boosts the attractiveness of a direct-lending solution, which has fixed terms and no flex.

In addition, sponsors oftentimes don't like to take the chance that their deal may struggle because even though the banks may have underwritten it, it's very time-consuming and disruptive and -- to their financing process to have a syndicated deal struggle. So we oftentimes will see companies that are middle-market companies that might squarely fit in our investment profile, but they might only be a $200 million or $250 million term loan. That's low -- that's small for the syndicated market, and the market will just not pay attention to it. And it might be a perfectly fine company but one that requires more detailed understanding than the syndicated process will allow for.

But when -- our enthusiasm is not buying a deal that's in the market that's struggling, although we do that occasionally and they can be very interesting investments, our enthusiasm comes from new underwritings for new deals where the banks are backing away and the sponsors want certainty. And that's really what I was trying to describe. And I think that those companies can be really attractive companies and very consistent with the kinds of companies that are in our portfolio, and we’re not getting adversely selective.

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [18]

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That's really helpful color. Kind of on that point, to touch on that a little bit further. There's been some weakness recently at some pretty high-profile tech IPOs. It's some private market tech companies regarding their valuations. I know you guys are a big tech lender across the platform. Obviously, you guys have your tech-focused fund as well. Are you guys seeing any more opportunities? Would you guys expect your pipeline to grow in the future because of that weakness? And have you been seeing that grow recently?

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Craig W. Packer, Owl Rock Capital Corporation - President, CEO & Director [19]

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Sure. So in ORCC, we -- the companies we finance in particular are software businesses that are being acquired by financial sponsors that are companies with significant revenue. They're growing at a very attractive rate and have attractive repeatability and defensibility to their business models. The software space has been maybe the most active for financial sponsors, and the returns for the sponsors has been terrific. But these are established businesses in niche sectors that have really attractive market shares. I think the kind of IPOs that you're describing are businesses that oftentimes have business models that are still evolving. They may be companies that one day can be quite consequential, but they're not profitable today. And they're more venture-capital-backed businesses than what we are putting in ORCC.

ORCC's investing activity in the tech and software space is really LBL lending for cash flow-oriented software businesses. As you alluded to, Owl Rock Capital partners manages another fund that is in the tech space. I don't think it's appropriate to go into that on this call. That fund has a different strategy. Off-line, I'm happy to talk to people about that. It is a BDC. You can pull up public information on it. But that -- those types of investments are not what's going into ORCC.

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [20]

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Okay. That's helpful color. And then one more. I wanted to just get some more clarifications, color on Wings Fire.

You mentioned a $50 million commitment into that entity. I know -- can you maybe just give a little more detail and color around what is the end market? With sort of ABL loans does that hope to originate? And what are the size of the companies that they target? Obviously, Owl Rock focuses on larger companies that you guys view as more durable. I wanted to know the company size that Wings Fire is focusing on. Because obviously $50 million isn't a lot of capital to truly go after those larger companies. And I know it's a different business model as far as durability with the ABLs because you're more underwriting toward the assets.

And then just lastly on Wings Fire. Where do you expect that business? What is the goal for that business from a size standpoint, maybe 2 years from now?

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Craig W. Packer, Owl Rock Capital Corporation - President, CEO & Director [21]

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Sure. Look, I'm probably not going to go into a ton of detail on Wings Fire. We obviously wanted to highlight that we've made the commitment to make sure folks saw it. It's -- we made a $50 million commitment. At this point, there's been very little drawings on that commitment. It's basically funding the working capital, building on the team of Wings Fire, the investment activity had -- they're beginning to look at deals. They're open for business. If -- and there's a website that describes what they do.

For now, I would say it's ABL lending. And I think -- in the way that you would expect ABLs to be structured, working capital occasionally lending against real estate or some equipment. They're not -- that strategy is a different strategy than ORCC. They have their own investment team, their own origination team. While we certainly can refer deals to them, the strategy is not leveraging the Owl Rock team. It's for them to originate and they've got relationships and deeply experienced investment professionals to do ABL. But I think just like in the middle and upper middle market sponsor universe, there are deals that banks will do in the ABL space. Wells Fargo and the like will do that -- are -- of the highest quality but the lowest spread. And then there's other strategies and Wings Fire has a strategy to do deals that, for one reason or another, may not fit perfectly in a box that a bank might do, but can provide comparable downside protection and they can get a nice return on their investment. And I'm going to decline to speculate where it can go.

Obviously, we well understand for us to make that investment over time, for it to be consequential, we'd have to be comfortable that there's growth there. We think there is and you can look at other of our peers that have businesses of [this] size. But it's going to take some time.

I don't intend to kind of routinely talk about Wings Fire on these calls because I think it will take meaningful time for it to be material enough to talk about. But I -- but we wanted to have -- take this opportunity to mention it. So over time, when it does become consequential, people will understand the genesis of it.

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Operator [22]

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Your next question comes from Robert Dodd with Raymond James.

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [23]

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It's actually kind of almost a follow-up to your response to Ryan.

On the -- in the past, when we've seen some dysfunction in the syndicated loan market, it has been typically pretty easy to point to technical reasons. I mean loan fund outflows, et cetera.

This time, part of it does seem to be the lower ratings that are going out there and maybe a mix of downgrades and to your point, the stress that the rating agencies are expecting to see maybe in terms of how they're rating people.

So what's -- not that I want to use a cliché, but is it different this time in terms of -- is this more, you think, a fundamental dislocation in the syndicated market? Or do you think it's just, again, the transitory, kind of temporary technical issues that can be bounced back from pretty quick?

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Craig W. Packer, Owl Rock Capital Corporation - President, CEO & Director [24]

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Okay. I don't think there's anything profound going on in the market. You can look at the fourth quarter of last year and the market traded up much more severely than what we've seen in the last month or so.

So I think, look, the levered loan market, like many financial markets, has been incredibly strong for a substantial period of time and not exhibited a historic volatility that the leveraged finance space typically has, given the low interest rate environment. So I view what's going on now -- it's just a garden-variety bumps in the market, and I think it's somewhat overdue.

And as I commented, markets back -- bounce back quickly. So I -- that may very well happen here as well or it may not. But I don't think there's anything particularly unusual. We had markets that were somewhat priced for perfection and they've traded off some. And from my seat, that's a healthy market -- functioning market.

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [25]

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Okay. Got it. And then one more, if I can. I mean on the leverage target, obviously, at 75%, looking at the strong demand you're seeing out there in the market or what looks like you have very good credit quality in your book and in your underwritings. Has there been any discussions so far of potentially moving that target and asking permission to go to a higher leverage level, given some of the other vehicles, the outlook, obviously, do target that. Some arguably with slightly high-risk strategies. And so you've got a pretty low-risk strategy with ORCC with strong demand where you could maybe take advantage of a higher leverage level.

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Craig W. Packer, Owl Rock Capital Corporation - President, CEO & Director [26]

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Sure. The answer to this is no, we haven't had discussions about changing our leverage target. We've been pretty vocal and pretty consistent about this.

Obviously, there's a lot of different constituencies on to our view on leverage now and our shareholders, but our lenders and the rating agencies and our bond investors and so we try to be very consistent.

Our target is the 0.75 and we think for -- maybe that's the right place for us to be. We very much value having access to investment-grade bond market. We've highlighted that as an important part of our financing strategy. And so we're comfortable with our leverage target.

And while -- the reality is we're still 0.39x leverage. So it's not a practical constraint at this point. So no discussion of changing our leverage target.

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Operator [27]

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Your next question comes from Kenneth Lee with RBC Capital Markets.

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Kenneth S. Lee, RBC Capital Markets, Research Division - VP of Equity Research [28]

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And this is just partly related to the softening in the leveraged loan markets. But just from different perspective, could you just comment on the competitive activity perhaps you're seeing within direct lending versus other BCs over the last couple of months or so? And how does that compare with maybe over the past year? .

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Craig W. Packer, Owl Rock Capital Corporation - President, CEO & Director [29]

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So it's a competitive market. There's certainly other folks that do what we do. I think -- we think there's a -- I think what's misunderstood is folks look at the number of lenders or the number of BDCs, and they can view every one as being able to offer a similar solution. And as we've talked about on this call, we think our size, our relationships, the coverage that we give the financial sponsors, the -- are big differentiators. And I think you're seeing that in our success. And we're not the only one that has that size, and I think other large players are having also success.

And so I think the competitive environment, it's competitive, but we're finding very interesting investment opportunities. And we are finding we're able to successfully win those deals. Sponsors want to work with us. They reach out to us. We cover them well, and we're able to deliver very attractive solutions. They're choosing to work with us. We don't view it as a winner-take-all market. There are deals that we do that have other of our peers in them. Sponsors like to have 2 or 3 really good direct lending relationships and cultivate those relationships by bringing deal flow to them. They can't feed 10 mouths but they can certainly feed 2 or 3 mouths, and we've been pleased that many have chosen to make us one of those top 2 or 3 relationships.

And so I know some comment about increased competitive activity. It's competitive, but I think if you've got -- made the investment in resources, origination at the capital base and carefully manage those relationships, you can be successful.

If you've got a smaller platform or haven't made the investment or origination, you're going to have a hard time competing.

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Kenneth S. Lee, RBC Capital Markets, Research Division - VP of Equity Research [30]

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Got you. Very helpful. And just one follow-up, if I may. In terms of the time frame for achieving a fully levered target range, you mentioned like, 6 to 9 months remaining.

Just wondering what assumptions are built in there and specifically, if you continue to benefit from a weakening syndicated loan market, could we potentially see the time frame accelerate? .

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Alan J. Kirshenbaum, Owl Rock Capital Corporation - COO, CFO & Director [31]

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Sure. Thanks, Ken. It's Alan. So we -- as you recall, we put in our model that we saw by the end of 1Q or during 2Q, we would be fully invested. That's based on a relatively constant origination pace that we've seen over the last 3 or 4 or 5 quarters.

If the markets weaken more, we could certainly see that time line accelerate and pull forward, but we're very comfortable, we're on track as with everything we see sitting here today with that 6 to 9 months.

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Operator [32]

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(Operator Instructions)

Your next question comes from Fin O'Shea with Wells Fargo Security.

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Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [33]

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Just to continue on the theme of the larger middle-markets.

Greg, last quarter, you talked about -- as your platform scales and portfolio becomes larger and richer, that you would benefit from add-ons as many of the scaled direct lending firms do. But just thinking more, as you take on these loans that are the large $500 million tranches just below the syndicated markets, one might think that they're just one add-on away from going syndicated.

So any color there on -- do you expect to really be committing in upsizings of these loans that you're putting on this quarter and next quarter? .

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Craig W. Packer, Owl Rock Capital Corporation - President, CEO & Director [34]

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Sure. Look, our bread and butter is 100 to 400, right? There are -- some of them are significantly bigger deals but they're the exception, they're not the rule. The -- there's a lot of reasons why sponsors choose a direct solution. It's not just about price. They like working with lenders and understand their businesses and have the capacity to help them grow. They find that there's a value to that, and we get a premium for that. .

The syndicated markets, we've touched on this. It's very ratings-driven, and it's difficult -- it can be difficult for companies when they do a syndicated loan and that loan trades off and the company has an MFN in their facility or maybe they're going to get a downgrade and that places that company in a very difficult circumstance to be able to raise incremental capital. None of those issues exist in a direct lending solution.

And so what I think you're seeing, not only from us, but from others in the space, is that the bar for where sponsors are willing to do direct solutions is going up. They're willing to do it at -- for bigger companies, and they like it because of the certainty, flexibility, ability to grow. 4 or 5 years ago, the firms didn't have enough capacity to help these companies broadly. They had to go to the syndicated market to get capacity. And so that doesn't exist.

So I think that -- I don't think it's the case that because we're doing bigger deals, they're more likely to go syndicated. But if they do, that's okay. We'll continue to do the deals. And if over time, they get taken out in the syndicated market at more attractive pricing, I think that's not a bad place for us to be.

But I suspect what you're going to see is the opposite. I suspect what you're going to see is sponsors who haven't done direct deals in the past are starting to do them, and they're finding it attractive and they're going to start getting more comfortable with that solution and be more willing to use it, not less.

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Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [35]

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Sure, that's helpful. And you mentioned it's the larger below-syndicated deals are just part of what you do.

But can you kind of give -- expand on that? Really, how even-keeled is the platform and the portfolio? Because a lot of these -- one would think a lot of these larger deals, you're benefiting from the environment. But say the syndicated market comes back and they all fly off, do you have the focus on more of the -- more stable core middle markets that would allow you to pivot, continue to originate, maintain a portfolio if these names were to fly off in a couple of quarters upon a market return?

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Craig W. Packer, Owl Rock Capital Corporation - President, CEO & Director [36]

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Look, I think we -- in 3.5 years, we've demonstrated a terrific ability to originate loans in a very consistent way. In most of that period of time, the syndicated markets have been extremely strong and our pace of origination has been strong throughout.

This quarter was not only not a record quarter for us. It wasn't even the second-biggest, most active quarter. We don't think what we did this quarter or what we'll do next quarter is a reflection of market environment, it's a reflection of the value proposition we have to borrowers and it -- all the positive attributes of our platform that I've talked about.

In any 1 quarter or 2, there can be a deal or 2 that gets one direction or the other, but I don't think that there's anything particular about what we've done this quarter that should make you think we're any more vulnerable to refinancings than what we did a year ago or 2 years ago. And so I don't -- I think we focus on middle and upper middle market because of credit quality. And definitions of what's core middle market and the like, I think they're just subjective judgments and sponsors choose direct solutions for a variety of reasons that I talked about.

So I don't view any -- the names on our book as particularly vulnerable. Just remember, when a sponsor puts in place the capital structure, they pay us significant fees and oftentimes, we have call protection. So even if the market were to [rip] tighter in 6 months, it would be not cost-effective for them to refinance that capital structure. And so -- and that's not something we would expect. And we haven't experienced -- and I don't think other people have. It's more, over time, companies really transform their businesses to be much bigger or they sell the company, that's where you'll see the refinancings. Sure, you can always get refinanced, but I don't think this environment is particularly vulnerable to refinancings.

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Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [37]

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And one more, if I may, for Alan. Appreciated your color on the funding markets. Just noticing, I think last quarter, you mentioned more so a focus -- you highlighted more so CLOs in terms of future financing. But did I -- did we see a language change this quarter toward more unsecured?

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Alan J. Kirshenbaum, Owl Rock Capital Corporation - COO, CFO & Director [38]

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No, no. The short answer is no. We will continue to do. We have 4 now SPV drop-down facilities. And over time, we would look to take those out with CLO takeouts. We were just very active in the unsecured markets for 2 quarters in a row.

So my emphasis on my prepared remarks this quarter was around the public bond issuance deal that we did earlier this month. But we continue to be out in the markets looking to do CLO takeouts. It's a very efficient way to finance our balance sheet. Our strategy on the financing landscape has not changed at all.

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Operator [39]

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Your next question comes from Casey Alexander with Compass Point.

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Casey Jay Alexander, Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst [40]

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You previously mentioned about, hopefully, being fully invested by 2Q of 2020. Can you remind us how you judge that? Do you judge that by a total portfolio size or by a target leverage ratio? And if it's by a target leverage ratio, what's that target or range?

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Alan J. Kirshenbaum, Owl Rock Capital Corporation - COO, CFO & Director [41]

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Sure. It's both, Casey. So $10 billion portfolio based on our equity size is about 3/4 of return leverage.

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Casey Jay Alexander, Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst [42]

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Great. All right. And there's been -- I want to try to contour -- as the market -- just for my own benefit to make sure I understand it and then ask you to correct me where I've got -- kind of got it misunderstood. I mean based upon a lot of what we've been reading, there's sort of a buyer's strike in the broadly syndicated loan market at the single B level because of fear of what a downgrade could do to CLO structures. And that is creating a better opportunity set for upper middle market lenders like yourself that is allowing for some acceleration of origination. Is that kind of a correct contour of what the market is doing right now?

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Craig W. Packer, Owl Rock Capital Corporation - President, CEO & Director [43]

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So I'll come back to what you outlined in a second, but I just want to level-set you.

We've been very active for 3.5 years and most of that period of time, the markets have been very strong, and there's been no buyer strike.

Direct lending has grown and penetrated the syndicated market because of the solutions that direct lenders can offer. And for bigger and bigger companies, they're finding the package [of] certainty. Lenders who understand their businesses, who can help them grow, lenders they know and trust, the privacy of the solution. All of that is more attractive than doing a syndicated loan, which is cumbersome, involves a lot of steps in the process, the banks [commit with flex] , et cetera. So that's the broader trend.

In the last quarter and now into this quarter, in addition to that broader trend, I think what you described is generally a decent description. There's been outflows from mutual funds, CLO creation has slowed. So for the manager to buy the incremental position, the bar is higher.

And as the secondary market trades off, the new issue that comes behind it has to be priced attractively for that to be successful. But I don't -- it may get more interesting from here. Fourth quarter of last year was -- it got -- it was more interesting than what we saw in the third quarter of this year. So I don't want to overstate what the impact has been, but it's been wind at the back for direct lenders that may continue.

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Casey Jay Alexander, Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst [44]

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Okay. And has that had any beneficial impact on your origination spreads?

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Craig W. Packer, Owl Rock Capital Corporation - President, CEO & Director [45]

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As I said in the comments, it has begun to have a positive impact, but it takes time to work its way through. We would like to see spreads go wider because of the lower LIBOR rate, and we're starting to see that benefit. But other lenders may or may not have the same discipline and we'll just have to see if that works its way through. But we have increased our spread this quarter, and it's gone up each of the last 3 quarters. And obviously, we would prefer to have wider spreads, so we will -- we shall see. But certainly, the lower LIBOR means we want to be that much more disciplined about the spread for new issues.

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Operator [46]

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There are no further questions at this time. I will now turn the call back over to Craig and Alan for closing remarks.

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Craig W. Packer, Owl Rock Capital Corporation - President, CEO & Director [47]

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Okay. Thanks, everyone, for dialing in. Appreciate the questions. Look forward to keeping you updated and talking to you next quarter.

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Alan J. Kirshenbaum, Owl Rock Capital Corporation - COO, CFO & Director [48]

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Thank you very much.

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Operator [49]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.