Business Context and Reporting Period
Company: Owl Rock Capital Corporation (Owl Rock)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2018
Business Overview: Owl Rock is an externally managed, closed-end management investment company regulated as a Business Development Company (BDC) and a Regulated Investment Company (RIC). The company focuses on originating and making senior secured, second-lien, and mezzanine debt investments, as well as equity-related securities, in U.S. middle-market companies. As of December 31, 2018, the portfolio consisted of 73 portfolio companies with a weighted average annual revenue of $468 million and EBITDA of $81 million. The company has no public market for its common stock and operates under a private offering structure with $5.5 billion in total capital commitments from investors, of which $3.1 billion had been drawn down.
Key Financial Metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Total Investment Income | $388.7 million | $159.9 million |
| Total Expenses | $142.2 million | $65.9 million |
| Net Investment Income (After Tax) | $245.4 million | $93.8 million |
| Net Increase in Net Assets from Operations | $202.2 million | $103.7 million |
| Earnings Per Share (Basic & Diluted) | $1.38 | $1.55 |
| Total Assets | $5.95 billion | $2.44 billion |
| Total Debt (Net Carrying Value) | $2.57 billion | $0.92 billion |
| Net Assets | $3.26 billion | $1.47 billion |
| Net Asset Value (NAV) Per Share | $15.10 | $15.03 |
| Asset Coverage Ratio | 225% | 258% |
| Weighted Average Portfolio Yield (Fair Value) | 9.4% | 8.8% |
Material Changes vs. Prior Period
- Portfolio Growth: The investment portfolio grew significantly, with total investments at fair value increasing from $2.39 billion in 2017 to $5.78 billion in 2018. The number of portfolio companies increased from 40 to 73.
- Revenue Expansion: Total investment income more than doubled to $388.7 million, driven primarily by a $215.6 million increase in interest income due to the larger portfolio size.
- Expense Increase: Total expenses rose to $142.2 million from $65.9 million. This was primarily due to a $52.2 million increase in interest expense (driven by higher borrowings and rates) and a $21.0 million increase in management fees.
- Leverage Utilization: Outstanding debt principal increased from $932.0 million to $2.59 billion. The company utilized multiple credit facilities, including a Subscription Credit Facility, Revolving Credit Facility, and three SPV Asset Facilities, alongside $150 million in 2023 Notes.
- Unrealized Losses: The company recorded a net change in unrealized losses of $43.6 million in 2018, compared to unrealized gains of $9.2 million in 2017. This was largely attributed to valuation adjustments on the portfolio.
Guidance, Outlook, and Risks
Management Commentary & Outlook: Management believes the middle-market lending environment offers attractive opportunities due to limited capital availability from traditional banks. The company intends to continue generating current income and capital appreciation. The Board declared a distribution of 90% of estimated first-quarter taxable income on February 27, 2019. The company has a "wind-down" provision if an Exchange Listing is not consummated by March 3, 2021 (subject to extensions).
Key Risks & Contingencies:
- Liquidity Risk: There is no established public market for the company's common stock. Shareholders cannot redeem shares prior to an Exchange Listing.
- Leverage Risk: The company uses significant leverage (borrowings) to finance investments. A decline in asset values could cause NAV to decline more sharply than if unlevered. The asset coverage ratio must remain above 200% (or 150% with shareholder approval) to maintain BDC status and pay distributions.
- Interest Rate Risk: Approximately 99.6% of debt investments are floating rate. While this protects against rising rates, it exposes the company to increased borrowing costs if rates rise faster than investment yields.
- Adviser Dependency: The company has no employees and relies entirely on Owl Rock Capital Advisors LLC for investment management and operations.
- Valuation Uncertainty: Investments are valued at fair value as determined by the Board, which involves subjective judgment for illiquid assets.
Investor Verification Checklist
- Verify the status of the "Exchange Listing" and the timeline for the potential wind-down if a listing is not achieved by the 2021 deadline.
- Review the specific terms of the credit facilities (Subscription, Revolving, SPV) to understand maturity dates and borrowing base limitations.
- Confirm the composition of distributions (ordinary income vs. return of capital) for tax reporting purposes.
- Assess the impact of the $43.6 million unrealized loss on the portfolio's fair value and the specific drivers of this depreciation.
- Monitor the asset coverage ratio to ensure compliance with the 1940 Act requirements for maintaining BDC status and paying dividends.