Business Context and Reporting Period
Company: Owl Rock Capital Corporation (ORCC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2019
Business Overview: ORCC is a Maryland corporation organized as a Business Development Company (BDC) and a Regulated Investment Company (RIC). It focuses on originating and making senior secured loans, subordinated loans, and mezzanine loans to U.S. middle-market companies. The company is managed by Owl Rock Capital Advisors LLC.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 |
|---|---|---|
| Total Investment Income | $327.6 million | $151.5 million |
| Net Investment Income (After Taxes) | $215.6 million | $91.0 million |
| Net Increase in Net Assets from Operations | $239.2 million | $95.0 million |
| Earnings Per Share (Basic & Diluted) | $0.92 | $0.85 |
| Total Investments (Fair Value) | $7.24 billion | $5.78 billion |
| Total Debt (Net Carrying Value) | $1.57 billion | $2.57 billion |
| Cash and Restricted Cash | $247.8 million | $161.6 million |
| Net Asset Value (NAV) Per Share | $15.28 | $15.21 |
| Asset Coverage Ratio | 430% | 225% |
Material Changes vs. Prior Period
- Portfolio Growth: The investment portfolio grew significantly from $5.78 billion at year-end 2018 to $7.24 billion at June 30, 2019. This was driven by capital drawdowns totaling $2.33 billion during the six-month period.
- Revenue Surge: Total investment income more than doubled year-over-year, primarily due to the larger portfolio size and the acceleration of amortization of upfront fees and prepayment fees from four full paydowns.
- Expense Increase: Total expenses rose to $110.5 million from $59.9 million. Interest expense increased by $42.4 million due to higher average daily borrowings ($2.74 billion vs. $1.32 billion) and a higher average interest rate (4.84% vs. 3.86%). Management fees also increased due to higher gross assets.
- Debt Reduction: Total debt outstanding decreased significantly from $2.57 billion to $1.57 billion. This reduction was achieved by paying off the $883 million Subscription Credit Facility in June 2019 and utilizing proceeds from a new $596 million Collateralized Loan Obligation (CLO) transaction and $400 million in unsecured notes to restructure leverage.
- Unrealized Gains: The company recorded a net unrealized gain of $23.5 million for the six months ended June 30, 2019, compared to $7.8 million in the prior year period.
Guidance, Outlook, and Risks
- IPO Completion: On July 22, 2019, the company closed its Initial Public Offering (IPO), issuing 10 million shares at $15.30 per share, raising net proceeds of $141.3 million. Trading began on the NYSE under the symbol "ORCC" on July 18, 2019.
- Stock Repurchase Plan: The Board approved a 10b5-1 plan to repurchase up to $150 million of common stock when trading below NAV, commencing 30 days post-IPO.
- Distributions: The Board declared a regular distribution of $0.31 per share and a series of special distributions totaling $0.30 per share to be paid throughout late 2019 and 2020.
- LIBOR Risk: The company notes that the phase-out of LIBOR by the end of 2021 may require renegotiation of credit agreements with portfolio companies and lenders, potentially affecting returns.
- Market Risks: Risks include economic downturns impacting portfolio companies, interest rate volatility, and the illiquid nature of private market investments.
Investor Verification Checklist
- Debt Structure: Verify the terms and maturity profiles of the new CLO I ($390 million) and 2024 Notes ($400 million) issued in 2019.
- Asset Coverage: Confirm the 430% asset coverage ratio allows for future leverage deployment as the company transitions from private capital commitments to public equity.
- Fee Waivers: Review the Investment Advisory Agreement regarding the waiver of incentive fees and the cap on management fees (0.75% of gross assets) for the 15-month period following the IPO.
- Unfunded Commitments: Assess the $601 million in unfunded portfolio company commitments and the company's borrowing capacity to fund them.
- Valuation Methodology: Note that 97.5% of the portfolio is classified as Level 3 investments, relying on unobservable inputs and Board-determined fair value.