Business Context and Reporting Period
Company: Owl Rock Capital Corporation (Owl Rock)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2018
Business Overview: Owl Rock 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 | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|
| Total Investment Income | $151.5 million | $56.2 million |
| Net Investment Income (After Taxes) | $91.0 million | $32.1 million |
| Net Increase in Net Assets from Operations | $95.0 million | $38.3 million |
| Earnings Per Share (Basic & Diluted) | $0.85 | $0.74 |
| Total Investments (Fair Value) | $3.49 billion | $2.39 billion |
| Total Debt (Net Carrying Value) | $1.49 billion | $0.92 billion |
| Cash and Restricted Cash | $161.6 million | $20.1 million |
| Net Asset Value (NAV) Per Share | $15.21 | $15.03 |
| Asset Coverage Ratio | 238% | 258% |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments at fair value increased by approximately $1.1 billion (46%) from $2.39 billion to $3.49 billion, driven by significant capital drawdowns and new originations.
- Revenue Expansion: Total investment income more than doubled to $151.5 million, primarily due to the larger portfolio size. Interest income rose to $141.2 million from $55.0 million.
- Expense Increase: Total expenses increased to $59.9 million from $24.1 million. This was driven by a $20.9 million increase in interest expense (due to higher average borrowings and rates) and a $13.5 million increase in management fees (due to higher gross assets).
- Leverage: Outstanding debt principal increased from $932 million to $1.50 billion. The average interest rate on borrowings rose to 3.86% from 2.59%.
- Realized Losses: The company reported a net realized loss of $3.8 million for the six months ended June 30, 2018, compared to no realized gains or losses in the prior year period.
Guidance, Outlook, and Risks
Management Commentary: Management attributes the increase in investment income to portfolio growth and income from the Sebago Lake LLC joint venture. The company continues to focus on direct originations of senior secured loans to U.S. middle-market companies. The weighted average yield of the portfolio was 9.4% as of June 30, 2018.
Capital Resources: As of June 30, 2018, the company had $3.5 billion in undrawn capital commitments from investors. It also maintained $793.4 million in available borrowing capacity under its credit facilities.
Risks and Contingencies:
- Interest Rate Risk: 100% of debt investments are floating rate. While this protects against rising rates, it exposes the company to rate volatility. The company uses interest rate swaps to hedge fixed-rate debt (2023 Notes).
- Liquidity: The company relies on capital drawdowns and credit facilities. It must maintain an asset coverage ratio of at least 200% (or 150% under certain conditions) to incur additional debt.
- Valuation Risk: Substantially all investments are Level 3 (unobservable inputs), requiring fair value determination by the Board, which introduces estimation risk.
- Regulatory: The company must maintain RIC status to avoid corporate-level taxes, requiring distribution of at least 90% of taxable income.
Investor Verification Checklist
- Capital Commitments: Verify the status of the $3.5 billion in undrawn capital commitments and the timeline for the company's planned IPO or potential wind-down if an exchange listing is not achieved by March 3, 2021.
- Debt Covenants: Review the asset coverage ratio (238%) against the 200% regulatory minimum to assess leverage flexibility.
- Portfolio Quality: Confirm the credit rating distribution of the portfolio; 96.6% of the portfolio was rated 1 or 2 (lowest risk), with 3.4% rated 3 (increased risk).
- Interest Rate Sensitivity: Assess the impact of rising LIBOR on net investment income, given the floating-rate nature of both assets and liabilities.
- Sebago Lake JV: Review the performance and valuation of the 50% interest in Sebago Lake LLC, a controlled affiliated investment.