Business Context and Reporting Period
Company: Owl Rock Capital Corporation (Owl Rock)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2017
Business Overview: Owl Rock is a Maryland corporation organized as a Business Development Company (BDC) and a Regulated Investment Company (RIC). It 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, 2017 | Nine Months Ended Sep 30, 2017 | As of Sep 30, 2017 |
|---|---|---|---|
| Total Investment Income | $47.4 million | $103.5 million | N/A |
| Net Investment Income (After Tax) | $28.4 million | $60.4 million | N/A |
| Net Increase in Net Assets from Operations | $27.3 million | $65.6 million | N/A |
| Earnings Per Share (Basic & Diluted) | $0.37 | $1.12 | N/A |
| Total Investments (Fair Value) | N/A | N/A | $2.19 billion |
| Total Debt (Net Carrying Value) | N/A | N/A | $856.3 million |
| Cash and Cash Equivalents | N/A | N/A | $19.2 million |
| Net Asset Value (NAV) Per Share | N/A | N/A | $15.27 |
| Asset Coverage Ratio | N/A | N/A | 241% |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments at fair value increased from $967.4 million as of December 31, 2016, to $2.19 billion as of September 30, 2017. This growth was driven by significant capital drawdowns and new investment commitments.
- Revenue Expansion: Total investment income for the nine months ended September 30, 2017, was $103.5 million, a substantial increase from $11.4 million in the same period in 2016, primarily due to the larger investment portfolio.
- Expense Increase: Total expenses for the nine months ended September 30, 2017, rose to $43.0 million from $10.7 million in the prior year period. This increase was driven by higher management fees ($19.9 million vs. $4.7 million) and interest expense ($15.6 million vs. $0.8 million) associated with increased leverage and asset base.
- Debt Utilization: Outstanding debt principal increased from $495.0 million at year-end 2016 to $862.5 million at September 30, 2017. The company added a $400 million Revolving Credit Facility in February 2017 and expanded its Subscription Credit Facility.
- Capital Raise: During the nine months ended September 30, 2017, the company issued 38.0 million shares for aggregate proceeds of $574.9 million.
Guidance, Outlook, and Risks
Management Commentary:
- Investment Activity: For the three months ended September 30, 2017, the company funded $584.6 million in new investments. The weighted average yield of the debt portfolio was 8.8%.
- Sebago Lake LLC: The company formed a joint venture, Sebago Lake LLC, with The Regents of the University of California. Owl Rock sold three portfolio companies to Sebago Lake in Q3 2017, generating a realized gain of $0.5 million.
- Distributions: The Board declared distributions of $0.19, $0.24, and $0.26 per share in March, May, and August 2017, respectively. A subsequent distribution of $27.0 million was declared on November 7, 2017.
Risks and Contingencies:
- Market Risk: The company is exposed to interest rate risk, as 97.4% of its debt portfolio is floating rate. A 100 basis point increase in rates would increase net income by approximately $12.6 million annually.
- Liquidity: The company relies on capital drawdowns from investors ($3.6 billion unfunded commitments as of Sep 30, 2017) and credit facilities for liquidity.
- Valuation: Substantially all investments are Level 3 (unobservable inputs), requiring significant judgment by the Board to determine fair value.
- Regulatory: As a BDC, the company must maintain an asset coverage ratio of at least 200% to incur additional indebtedness.
Investor Verification Checklist
- Capital Commitments: Verify the status of the $3.6 billion in unfunded capital commitments from investors and the timeline for drawdowns.
- Debt Covenants: Review the terms of the Subscription Credit Facility and Revolving Credit Facility, specifically regarding asset coverage ratios and maturity dates (Subscription Facility matures in 2019; Revolving Facility matures in 2021).
- Valuation Methodology: Assess the Board's fair value determination process for Level 3 assets, which comprise the vast majority of the portfolio.
- Expense Ratios: Monitor the ratio of total expenses to average net assets (2.9% annualized for the nine months ended Sep 30, 2017) as the asset base grows.
- Sebago Lake JV: Track the performance and capitalization of the Sebago Lake LLC joint venture, including the $100 million commitment from each member.