Blue Owl Capital Corporation (formerly Owl Rock Capital Corporation) — Q1 2023 Form 10-Q
Business context and reporting period
For the quarter ended March 31, 2023, the company reported as a business development company and regulated investment company focused on originating loans to, and investing in, U.S. middle-market companies. Its common stock trades as ORCC. Blue Owl Capital Inc. is the company’s affiliate; this filing is for Owl Rock Capital Corporation, not Blue Owl Capital Inc.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 or prior date |
|---|---|---|
| Total investment income | $377.6 million | $264.2 million |
| Net investment income after tax | $177.9 million | $122.4 million |
| Net increase in net assets from operations | $201.8 million | $44.0 million |
| Earnings per share | $0.52 | $0.11 |
| Operating expenses | $196.4 million | $141.0 million |
| Interest expense; average borrowing rate | $104.0 million; 5.2% | $61.4 million; 2.9% |
| Cash from operations | $46.3 million provided | $13.5 million used |
| Net assets; NAV per share | $5.92 billion; $15.15 | $5.88 billion; $14.99 at December 31, 2022 |
| Debt, net carrying value | $7.38 billion | $7.28 billion at December 31, 2022 |
| Cash and restricted cash | $399.5 million | $445.1 million at December 31, 2022 |
Net investment income was about 47.1% of investment income, compared with 46.3% a year earlier. The filing reports annualized expenses and net investment income as 13.5% and 12.1% of average net assets, respectively. At March 31, investments totaled $13.16 billion at fair value across 187 portfolio companies. Net leverage was 1.21x debt-to-equity; statutory asset coverage was 178%, versus 179% at year-end. The company reported $1.27 billion of available debt capacity, subject to borrowing-base limits.
Material changes versus the prior comparable period
- Investment income rose 43%, primarily as the portfolio’s weighted-average yield increased to 11.5% from 11.0% at December 31, 2022, while debt investments at par remained broadly stable at about $11.7 billion.
- Expenses increased 39%, mainly from higher borrowing costs and incentive fees. Average daily borrowings rose to $7.5 billion from $7.2 billion, and the average interest rate increased to 5.2% from 2.9%.
- Net unrealized gains on investments were $75.7 million, compared with losses of $81.7 million in Q1 2022. Net realized investment losses were $52.5 million, compared with gains of $4.7 million. The filing attributes realized losses in part to restructurings and reversals of previously recorded unrealized losses.
- Non-accrual debt declined to 0.5% of debt amortized cost from 1.9% at year-end 2022. The portfolio’s investment ratings show 10.8% rated 3, 0.4% rated 4, and less than 0.1% rated 5.
- New investment commitments were $175.1 million, versus $530.4 million in Q1 2022; funded investments were $94.3 million versus $347.9 million. The company cited lower M&A activity, refinancing, repayments and originations amid higher rates and market uncertainty.
Outlook, risks, contingencies and unusual items
- Management said higher rates may benefit net investment income as floating-rate loans reset above floors, but warned that recession, portfolio-company deterioration and continued market volatility could adversely affect results. It described credit quality as consistent and said it was not seeing broad deterioration at the time of filing.
- About 98.2% of debt investments by fair value were floating-rate. The filing’s sensitivity analysis estimates that a 100-basis-point increase in base rates would raise annualized net income by $74.1 million, while a 100-basis-point decrease would reduce it by the same amount, assuming no portfolio or borrowing-structure changes.
- Payment-in-kind interest and dividends were $52.9 million, or 14.0% of investment income, up from 10.4% a year earlier. PIK accruals are not current cash receipts. Most investments are Level 3 and illiquid; fair values depend substantially on unobservable inputs and may differ from realized proceeds. Restricted securities were valued at $1.8 billion, or 29.8% of net assets.
- Unfunded portfolio-company commitments totaled $941.8 million. Management believed available resources were adequate to meet them. The company had no material pending or threatened litigation requiring disclosure, and reported no defaults upon senior securities.
- The company declared Q1 distributions of $0.33 per share plus a $0.04 supplemental distribution. After quarter-end, the Board declared a $0.33 Q2 dividend and a $0.06 supplemental distribution. Distributions may exceed taxable earnings and could include a return of capital; tax character is determined at year-end.
- Notable post-quarter developments: the revolving facility’s maximum was reduced from $1.86 billion to $1.80 billion; SPV Asset Facility II was amended to extend its reinvestment period and maturity, increase its advance rate and raise its margin. A new $397.7 million CLO X securitization closed in March.
Most important facts for investors to verify
- Whether higher floating-rate income continues to outweigh rising financing costs, and how rate resets affect net investment income and distributions.
- Portfolio credit performance, especially rating migrations, non-accrual balances, restructurings, and the sizeable PIK component.
- The sustainability of fair values and NAV, given the high share of Level 3, illiquid and restricted investments and the quarter’s mix of unrealized gains and realized losses.
- Debt capacity, asset coverage, facility borrowing-base restrictions, upcoming maturities and the ability to fund $941.8 million of unfunded commitments.
- Whether distributions remain covered by investment income and taxable earnings; the filing does not establish that future distributions are assured.