Business Context and Reporting Period
Company: Owl Rock Capital Corporation (Owl Rock Capital Corp)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2018
Business Overview: The Company 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 portfolio consists predominantly of senior secured floating-rate loans.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2018 | As of Sep 30, 2018 |
|---|---|---|---|
| Total Investment Income | $110.5 million | $262.0 million | N/A |
| Net Investment Income (After Taxes) | $71.6 million | $162.6 million | N/A |
| Total Expenses | $38.6 million | $98.6 million | N/A |
| Net Increase in Net Assets from Operations | $72.3 million | $167.3 million | N/A |
| Earnings Per Share (Basic & Diluted) | $0.44 | $1.29 | N/A |
| Total Investments (Fair Value) | N/A | N/A | $4.69 billion |
| Total Debt (Net Carrying Value) | N/A | N/A | $1.97 billion |
| Cash and Restricted Cash | N/A | N/A | $151.9 million |
| Net Asset Value (NAV) Per Share | N/A | N/A | $15.27 |
| Asset Coverage Ratio | N/A | N/A | 237% |
Material Changes vs. Prior Comparable Period
- Portfolio Growth: Total investments at fair value increased from $2.39 billion as of December 31, 2017, to $4.69 billion as of September 30, 2018. The portfolio at par value grew from $2.2 billion to $4.8 billion.
- Revenue Increase: Total investment income for the nine months ended September 30, 2018, rose to $262.0 million from $103.5 million in the prior year period. This was primarily driven by a larger investment portfolio and dividend income from the Sebago Lake joint venture ($5.1 million).
- Expense Increase: Total expenses for the nine months ended September 30, 2018, increased to $98.6 million from $43.0 million in the prior year. This was driven by higher management fees (due to increased gross assets) and interest expense (due to increased borrowings and higher average interest rates).
- Leverage: Outstanding debt principal increased from $932 million at December 31, 2017, to approximately $1.99 billion at September 30, 2018. Average daily borrowings for the nine-month period increased to $1.48 billion from $0.59 billion.
- Unrealized Gains/Losses: The Company recorded a net unrealized gain of $4.3 million for the nine months ended September 30, 2018, compared to $4.6 million in the prior year period. For the three-month period, there was a net unrealized loss of $3.4 million.
Guidance, Outlook, Risks, and Unusual Items
- Capital Commitments: As of September 30, 2018, the Company had $5.5 billion in total capital commitments from investors, with $2.9 billion undrawn. These commitments will expire upon the completion of an initial public offering (IPO).
- Investment Activity: The Company continues to focus on direct originations of senior secured loans to U.S. middle-market companies. 100% of debt investments are at floating rates.
- Joint Venture (Sebago Lake): The Company holds a 50% interest in Sebago Lake LLC, a joint venture with The Regents of the University of California. As of September 30, 2018, the Company's investment in Sebago Lake was $102.3 million (fair value).
- Risks:
- Interest Rate Risk: While the portfolio is predominantly floating-rate, rising rates increase borrowing costs. The Company uses interest rate swaps to hedge fixed-rate debt (2023 Notes).
- Covenant-Lite Loans: The Company may invest in "covenant-lite" loans, which offer fewer protections to lenders compared to loans with financial maintenance covenants.
- Liquidity: The Company relies on capital drawdowns, credit facilities, and the 2023 Notes for liquidity. It maintains sufficient capacity to cover unfunded portfolio commitments.
- Valuation Risk: Most investments are Level 3 (unobservable inputs) and valued by the Board. Forced liquidation could result in values different from fair value.
- Unusual Items: No material unusual items were reported. The Company recorded excise tax expenses of $0.2 million and $0.8 million for the three and nine months ended September 30, 2018, respectively.
Important Facts for Investor Verification
- Asset Coverage Ratio: Verify the 237% asset coverage ratio to ensure compliance with the 1940 Act (minimum 200% or 150% under certain conditions).
- Unfunded Commitments: Confirm the $528 million in unfunded portfolio company commitments and the Company's ability to fund them given current liquidity and borrowing capacity.
- Debt Maturities: Review the contractual obligations table; $620 million of debt (Subscription Credit Facility) is due within one year, while other facilities mature between 2022 and 2026.
- Interest Rate Sensitivity: Assess the impact of interest rate changes on net income, as 100% of the debt portfolio is floating-rate.
- Related Party Transactions: Verify the terms of the Investment Advisory Agreement and Administration Agreement with Owl Rock Capital Advisors LLC, including the management fee structure (0.75% of average gross assets pre-IPO).
- Level 3 Valuations: Scrutinize the valuation methodology for Level 3 investments, which comprise the vast majority of the portfolio, as these rely on unobservable inputs.