Business Context and Reporting Period
Company: Owl Rock Capital Corporation (ORCC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2020
Business Overview: ORCC is a Maryland corporation organized as a Business Development Company (BDC) and a Regulated Investment Company (RIC). It primarily originates and makes loans to, and makes debt and equity investments in, U.S. middle-market companies. The company is managed by Owl Rock Capital Advisors LLC.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2020 | Dec 31, 2019 (Balance Sheet) |
|---|---|---|---|
| Total Investments (Fair Value) | $9.92 billion | $9.92 billion | $8.80 billion |
| Total Assets | $10.23 billion | $10.23 billion | $9.20 billion |
| Total Debt (Net Carrying Value) | $4.31 billion | $4.31 billion | $3.04 billion |
| Cash and Restricted Cash | $220.5 million | $220.5 million | $317.2 million |
| Net Investment Income (After Tax) | $127.4 million | $402.9 million | N/A |
| Net Increase in Net Assets from Operations | $216.0 million | $207.1 million | N/A |
| Earnings Per Share (Basic & Diluted) | $0.56 | $0.53 | N/A |
| Net Asset Value (NAV) Per Share | $14.67 | $14.67 | $15.24 |
| Asset Coverage Ratio | 229% | 229% | 293% |
Material Changes vs. Prior Comparable Period
- Portfolio Growth: Total investments at fair value increased by approximately $1.12 billion (12.7%) from $8.80 billion at December 31, 2019, to $9.92 billion at September 30, 2020. This growth was driven by new originations and the deployment of capital from new debt issuances.
- Leverage Increase: Total debt increased significantly from $3.04 billion to $4.31 billion. This was primarily due to the issuance of new unsecured notes (July 2025 Notes and 2026 Notes) and the completion of two new Collateralized Loan Obligations (CLO III and CLO IV) during the period.
- Unrealized Gains/Losses: For the nine months ended September 30, 2020, the company reported a net unrealized loss of $196.3 million, compared to a net unrealized gain of $2.8 million in the prior year period. This decline was attributed to widening credit spreads and market volatility in the first quarter of 2020 due to the COVID-19 pandemic, though valuations improved in the second and third quarters.
- Expense Management: Net operating expenses increased to $178.9 million for the nine months ended September 30, 2020, from $160.5 million in the prior year. This increase was largely due to higher management fees (driven by asset growth) and interest expense (driven by higher average borrowings), partially offset by significant fee waivers totaling $122.9 million.
Guidance, Outlook, Risks, and Unusual Items
- COVID-19 Impact: Management notes that the pandemic has caused business shutdowns and economic instability. While originations decreased in the first half of 2020, they increased in the third quarter. The company is closely monitoring portfolio companies for financial distress and has executed amendments to loan documents to provide liquidity, sometimes utilizing payment-in-kind (PIK) interest.
- Fee Waivers: The Adviser waived management fees and incentive fees through October 18, 2020. For the nine months ended September 30, 2020, total waivers amounted to $122.9 million ($52.4 million in management fees and $70.5 million in incentive fees).
- Stock Repurchase Plan: The company exhausted its $150 million 10b5-1 stock repurchase plan on August 4, 2020, having repurchased approximately 12.5 million shares. On November 3, 2020, the Board approved a new repurchase program of up to $100 million.
- Key Risks:
- Interest Rate Risk: The portfolio is predominantly floating-rate, but the company uses interest rate swaps to hedge fixed-rate debt. The decommissioning of LIBOR poses a transition risk.
- Credit Risk: Economic downturns could impair portfolio companies' ability to repay, leading to defaults or write-downs. As of September 30, 2020, 2.2% of debt investments were on non-accrual status.
- Liquidity Risk: While the company maintains borrowing capacity, a contraction in credit markets could impair lending activities.
Important Facts for Investor Verification
- Asset Coverage Ratio: Verify the company's compliance with the 150% asset coverage requirement (reduced from 200% effective June 9, 2020). The ratio stood at 229% as of September 30, 2020.
- Non-Accrual Status: Review the specific portfolio companies placed on non-accrual status (e.g., Swipe Acquisition Corp) and the status of workout discussions or restructuring plans.
- Fee Waiver Expiration: Confirm the impact on future earnings once the management and incentive fee waivers expire (October 18, 2020).
- Debt Maturities: Assess the maturity profile of the increased debt load, particularly the new CLOs and unsecured notes issued in 2020.
- Unrealized Losses: Monitor the reversal of unrealized losses, particularly for investments like Geodigm Corporation, which was repaid at par subsequent to the quarter-end.