Business Context and Reporting Period
This unaudited Form 10-Q covers Owl Rock Technology Finance Corp. (the filing entity associated with the requested Blue Owl Technology Finance Corp. record) for the three and nine months ended September 30, 2020, filed November 10, 2020. The company is a Maryland business development company and regulated investment company that originates debt and equity investments in technology-related companies, primarily in the United States.
As of September 30, 2020, the portfolio comprised 43 companies with aggregate fair value of approximately $2.5 billion. The portfolio was 73.9% first-lien senior secured debt, 5.3% second-lien senior secured debt, 15.1% unsecured debt and 5.7% equity, based on fair value.
Financial Metrics
| Metric | Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2020 |
|---|---|---|
| Total investment income | $45.5 million | $120.7 million |
| Total expenses | $24.3 million | $61.6 million |
| Net investment income after taxes | $21.1 million | $58.7 million |
| Net unrealized gain | $31.3 million | $19.6 million |
| Net realized gain | $0.3 million | $0.3 million |
| Net increase in net assets from operations | $52.7 million | $78.7 million |
| Earnings per share | $0.53 | $0.98 |
- Net investment income represented approximately 46% of quarterly investment income and 49% of nine-month investment income before taxes; the filing does not present a conventional operating-company margin.
- Cash was $29.8 million at September 30, 2020, compared with $142.4 million at December 31, 2019.
- Net assets were $1.459 billion, compared with $777.2 million at December 31, 2019. NAV per share was $14.66 versus $14.70.
- Total investments at fair value were $2.467 billion, compared with $1.476 billion at December 31, 2019.
- Debt had a net carrying value of $1.009 billion and outstanding principal of $1.034 billion. Asset coverage was 240%, compared with 193% at year-end 2019.
- Available debt capacity was approximately $1.080 billion, subject to borrowing-base and other facility limitations. Total investor capital commitments were approximately $3.0 billion, of which $1.5 billion was undrawn.
- Unfunded portfolio-company commitments were $186.5 million, compared with $167.9 million at December 31, 2019.
- For the nine months, operating activities used $909.1 million of cash, while financing activities provided $796.6 million. Investment purchases were $1.229 billion and proceeds from investments were $270.1 million.
Debt and Liquidity
| Facility or Notes | Outstanding Principal | Key Terms |
|---|---|---|
| Subscription Credit Facility | $69.0 million | $700 million commitment; amount available $594.6 million |
| Revolving Credit Facility | $64.6 million | $540 million commitment; amount available $475.4 million; maturity September 2025 |
| SPV Asset Facility I | $290.0 million | $300 million commitment; LIBOR plus 3.50%; stated maturity August 2030 |
| June 2025 Notes | $210.0 million | 6.75% notes due June 2025 |
| December 2025 Notes | $400.0 million | 4.75% notes due December 2025 |
Management stated that cash, undrawn investor commitments and available debt capacity were expected to be sufficient for near-term investment and operating needs. Borrowing capacity and undrawn commitments were also expected to cover unfunded portfolio-company commitments.
Material Changes Versus Comparable Period
- Nine-month investment income increased to $120.7 million from $53.4 million, primarily because the portfolio expanded materially; the portfolio’s weighted average yield at amortized cost declined modestly from 7.9% to 7.8%.
- Nine-month net investment income after taxes increased to $58.7 million from $18.7 million, while earnings per share increased to $0.98 from $0.56.
- Quarterly net unrealized results improved to a $31.3 million gain from a $5.3 million loss in the prior-year quarter, primarily reflecting tighter credit spreads, improved market conditions and certain overperforming investments.
- Investment fair value increased by approximately $991 million from year-end 2019, supported by new investments, including unsecured debt and equity investments. The portfolio became more diversified across data and information services, food and beverage, financial services and eCommerce.
- Debt carrying value increased by approximately $184.7 million from year-end 2019, while average daily borrowings for the nine-month period increased to $820.2 million from $387.6 million. The average borrowing rate declined to 3.26% from 3.96%.
- New equity capital issued during the nine months totaled $646.2 million, compared with $384.4 million in the prior-year period.
- The Revolving Credit Facility was amended in September 2020, increasing commitments to $540 million, increasing the accordion feature to $1.25 billion and extending the stated maturity to September 2025.
- The company established the $300 million SPV Asset Facility I in August 2020 and issued $400 million of 4.75% December 2025 Notes in September 2020.
- Distributions declared during the first nine months totaled $0.63 per share, compared with $0.44 per share in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
- Management expected investment income to increase if the investment portfolio continued to grow, but provided no formal earnings or distribution guidance.
- Management expected portfolio-company performance to remain affected by COVID-19 during the fourth quarter of 2020 and emphasized preserving liquidity and available capital for existing portfolio companies.
- COVID-19 could cause portfolio-company financial distress, defaults, reduced interest payments, permanent investment impairments, lower distributions, reduced investment activity and difficulty refinancing or accessing capital markets.
- All debt investments were reported as performing, with no investments on non-accrual status. However, 2.5% of the portfolio was classified as investment rating 3, indicating performance below expectations and increased risk.
- Approximately 86.7% of debt investments were floating-rate. LIBOR discontinuation after 2021 could affect investment income, borrowing costs, contract terms and valuations.
- Most investments were illiquid Level 3 assets. Level 3 investments represented $2.424 billion, or approximately 98% of total investment fair value, making valuations dependent on unobservable inputs and management judgment.
- Payment-in-kind interest increased materially to $11.0 million for the nine months from $0.6 million in the prior-year period. PIK income is generally not received in cash and may increase collection and valuation risk.
- The company relies on leverage, capital calls, borrowing-base availability and portfolio cash flows. Secured financing facilities are collateralized by investor commitments or portfolio assets, and debt agreements contain financial covenants and restrictions on distributions and additional indebtedness.
- The company remains subject to BDC and RIC qualification requirements, including asset diversification and minimum distribution requirements. It accrued $0.3 million of federal excise tax for the nine months.
- No material litigation, defaults upon senior securities or material control deficiencies were reported. Disclosure controls and procedures were deemed effective.
Important Facts for Investors to Verify
- Confirm the entity-name transition from Owl Rock Technology Finance Corp. in the filing to Blue Owl Technology Finance Corp. in current records.
- Review the valuation assumptions for the predominantly Level 3 portfolio, including market yields, transaction prices and revenue multiples.
- Assess COVID-19 effects on portfolio-company liquidity, covenant compliance, defaults, non-accruals and subsequent fair-value changes.
- Verify the availability and borrowing-base eligibility of the reported $1.080 billion of debt capacity and the terms of the amended credit facilities.
- Evaluate maturity and refinancing exposure for the $610 million of unsecured notes due in 2025 and the SPV facility’s structural subordination and collateral arrangements.
- Monitor PIK interest, distribution coverage, undrawn investor commitments and the $186.5 million of unfunded portfolio-company commitments.
- Review LIBOR-transition provisions in portfolio investments and debt agreements, including potential effects on yields and borrowing costs.