Blue Owl Capital Corp. (Registrant: Owl Rock Capital Corporation) — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; filed August 3, 2022. The filing is for Owl Rock Capital Corporation (NYSE: ORCC), advised by an affiliate of Blue Owl Capital Inc. (NYSE: OWL), rather than the parent company’s consolidated results. Amounts below are in U.S. dollars.
Business context and financial results
ORCC is a business development company focused primarily on originating loans to U.S. middle-market companies, with a smaller allocation to equity investments. Its objective is current income and, to a lesser extent, capital appreciation.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Investment income | $273.3 million | $249.0 million | $537.4 million | $470.6 million |
| Operating expenses | $146.6 million | $129.7 million | $287.6 million | $247.5 million |
| Net investment income after tax | $125.1 million | $119.1 million | $247.5 million | $221.8 million |
| Net realized and unrealized gain (loss) | $(160.1) million | $31.1 million | $(238.4) million | $86.2 million |
| Net increase (decrease) from operations | $(34.9) million | $150.2 million | $9.0 million | $308.0 million |
| Earnings per share, basic and diluted | $(0.09) | $0.38 | $0.02 | $0.79 |
For the quarter, investment income rose about 10% year over year and net investment income rose about 5%, but market-driven unrealized losses more than offset operating income, producing a net loss from operations. For the first half, investment income rose about 14% and net investment income about 12%, while net results from operations fell sharply versus 2021 because of portfolio valuation losses.
Portfolio, income quality and returns
- At June 30, investments had $12.65 billion fair value, compared with $12.74 billion at December 31, 2021. The portfolio comprised 168 companies; 73.1% of fair value was first-lien secured debt and 14.5% second-lien secured debt.
- Management reported an 8.7% weighted-average total portfolio yield at fair value, up from 7.7% at year-end 2021. Weighted-average yield on accruing debt and income-producing securities was 8.9% at fair value.
- 98.8% of debt investments by fair value were floating rate. Payment-in-kind interest and dividends were 11.7% of Q2 investment income and 11.1% for the first half, versus less than 5% in the comparable 2021 periods.
- Debt investments were valued at 96.6% of principal at quarter-end, down from 97.7% at March 31 and 98.2% at December 31, 2021. Management attributed the decline principally to market volatility and wider credit spreads.
- Non-accrual debt was 0.2% of debt amortized cost, broadly unchanged from year-end. CIBT Global loans were identified as non-accrual; their reported fair value was approximately $11.0 million.
- Most investments were Level 3, using significant unobservable valuation inputs. Restricted securities had fair value of $1.3 billion, or 22.9% of net assets.
Cash flow, balance sheet and distributions
- At June 30, total assets were $13.09 billion, liabilities $7.38 billion, and net assets $5.70 billion. NAV was $14.48 per share, down from $15.08 at December 31, 2021.
- Debt had a net carrying value of $7.05 billion and outstanding principal of $7.20 billion. Asset coverage was 179%, compared with 182% at year-end; management reported net debt-to-equity of 1.20x and a target leverage range of 0.90x–1.25x.
- Cash and restricted cash, including foreign cash, totaled $343.3 million. The company reported $1.4 billion available under credit facilities, subject to borrowing-base and other limitations.
- For the six months, operating activities provided $74.7 million of cash, versus using $574.4 million in 2021. Financing activities used $178.6 million, including $232.4 million of cash distributions paid. Investment purchases were $1.38 billion and investment proceeds and repayments were $1.29 billion.
- The company declared distributions of $0.31 per share for each of the first two 2022 quarters. The board later declared another $0.31 per share, payable on or before November 15, 2022. Management cautioned that distributions may exceed taxable earnings and could include return of capital.
Material changes versus comparable periods
- Q2 investment income increased, helped by portfolio growth and higher dividend income, including dividends from Wingspire and ORCC Senior Loan Fund. Prior-year-period income included higher prepayment and accelerated-fee income, which declined from $15.3 million to $3.3 million in Q2 2022.
- Q2 expenses increased, chiefly from higher interest expense and management and incentive fees. Interest expense rose to $67.3 million from $54.4 million; average daily borrowings increased to $7.1 billion from $6.1 billion and the average interest rate rose to 3.2% from 3.0%.
- Quarterly unrealized investment losses were $156.6 million before foreign-currency translation and tax effects, compared with gains in Q2 2021. For the first half, investment unrealized losses were $238.3 million, versus gains of $118.8 million in 2021.
- New investment commitments were $603.4 million in Q2, down from $1.58 billion a year earlier; funded investments were $341.3 million versus $1.41 billion. New-debt commitment spreads averaged 7.2%, versus 6.7%, and weighted-average rates were 9.5%, versus 7.6%.
Outlook, risks and unusual items
- Management said rapidly rising rates, market uncertainty and reduced M&A activity lowered repayments and originations, and expected both to remain modest under then-current conditions. It reported no broad deterioration in portfolio-company performance at the time of filing.
- Management expected higher base rates to benefit net investment income in Q3 as rates moved above portfolio floors. That potential benefit is subject to higher borrowing costs and borrowers’ ability to service debt; the filing also highlights inflation, supply-chain and labor pressures, recession risk, geopolitical events, and market volatility.
- Unfunded portfolio-company commitments were $996.6 million, up from $963.8 million at year-end. Management stated it believed resources were adequate to meet them.
- Fair values are estimates for a largely illiquid, Level 3 portfolio and may differ materially from proceeds ultimately realized. Market spread widening drove the decline in investment valuations and NAV.
- On April 20, 2022, the company completed a $669.2 million CLO V refinancing. After quarter-end, it completed a $350.47 million CLO VII securitization on July 26 and increased ORCC Senior Loan Fund commitments; ORCC’s pro-rata commitment rose from $325.1 million to $500.1 million, with its economic ownership remaining 87.5%.
- Management reported no material pending or threatened litigation requiring disclosure, no defaults upon senior securities, and effective disclosure controls. It identified no material change in internal controls during the quarter.
Most important facts for investors to verify
- Whether portfolio marks, especially Level 3 valuations, and reported NAV remain supported as credit spreads and market conditions change.
- Whether rising floating-rate loan income outweighs higher funding costs and borrower stress; track non-accruals, PIK income and portfolio-company coverage.
- Liquidity and leverage headroom after accounting for the $996.6 million in unfunded commitments, borrowing-base limits, and the 179% asset-coverage ratio.
- Whether distributions remain covered by recurring net investment income and taxable income, and whether any portion is classified as return of capital.
- The economics and risks of the CLO V refinancing, the post-quarter CLO VII transaction, and the expanded ORCC Senior Loan Fund commitment.