Blue Owl Technology Finance Corp. — Q2 2023 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2023; filed August 11, 2023. The company is a BDC and RIC focused primarily on debt and equity investments in U.S.-based technology-related businesses. Its investment objective is current income and capital appreciation. The company was formerly Owl Rock Technology Finance Corp.; the name change took effect July 6, 2023. Its shares had no exchange listing stated in the filing.
Financial and portfolio performance
| Metric | Q2 2023 | Q2 2022 |
|---|---|---|
| Investment income | $171.2 million | $107.5 million |
| Expenses | $80.7 million | $36.6 million |
| Net investment income after taxes | $87.2 million | $67.5 million |
| Unrealized gain (loss) | $26.6 million | $(248.0) million |
| Net increase (decrease) in net assets from operations | $113.8 million | $(143.7) million |
| Earnings (loss) per share | $0.56 | $(0.71) |
For the six months ended June 30, investment income was $332.7 million versus $214.9 million; net investment income after taxes was $168.8 million versus $132.8 million; and net assets from operations increased $210.7 million versus a $178.9 million decrease. Six-month earnings per share were $1.03 versus a loss of $0.89.
At June 30, total investment fair value was $6.43 billion, net assets were $3.49 billion, and NAV was $17.01 per share, up from $16.70 at December 31, 2022. The portfolio included 119 companies. First-lien debt represented 64.9% of portfolio fair value; 96.5% of debt investments were floating rate. Weighted-average total portfolio yield was 10.4%, and yield on debt and income-producing securities was 12.3%.
Debt carrying value was $2.93 billion, down from $3.16 billion at year-end. Cash was $79.3 million and reported available facility capacity was $714.3 million. Asset coverage was 217% versus 206%; net debt-to-equity was 0.83x. For the six months, operating cash flow was $218.1 million, financing cash outflow was $342.1 million, and cash declined by $124.0 million to $79.3 million.
Changes versus comparable periods
- Q2 investment income rose 59% year over year, primarily as portfolio yield increased from 7.6% to 10.4% and the debt portfolio grew from $5.0 billion to $5.2 billion at par.
- Q2 expenses more than doubled, mainly reflecting higher interest expense, management fees, and incentive fees. Average borrowing cost increased to 6.1% from 4.0%, while average daily borrowings rose to $3.0 billion from $2.7 billion.
- Investment activity slowed: Q2 new commitments were $59.6 million net of sell-downs, versus $303.6 million in 2022; investments sold or repaid were $219.6 million versus $89.3 million. Management attributed slower activity to rising rates, reduced refinancing and M&A activity, and market uncertainty.
- Portfolio fair value was broadly stable from year-end, while six-month unrealized results improved to a $57.4 million gain from a $352.8 million loss in 2022. Debt fair value was 98.6% of principal, versus 97.9% at year-end.
- Non-accrual debt at amortized cost declined to $13.0 million (0.3% of debt) from $33.9 million (0.7%). Investments rated 3 or 4 increased to 7.1% of portfolio fair value from 5.6% rated 3 and none rated 4 at year-end.
Outlook, risks, and unusual items
Management said higher base rates should benefit investment income as rates exceed portfolio floors, but also highlighted the higher cost of borrowings. It described originations and repayments as moderate and said portfolio credit quality remained consistent, while warning that a prolonged recession could weaken borrowers. Management believed cash and borrowing capacity were adequate for near-term operations and investing needs, but did not provide earnings or investment-volume guidance.
PIK interest and dividend income was $40.2 million in Q2, or 23.5% of investment income; for the first half it was $79.3 million, or 23.8%. This income is accrued rather than necessarily received in cash. Approximately 94% of investment fair value was Level 3, based on significant unobservable inputs, making valuations less certain and potentially different from realizable sale values. Unfunded portfolio commitments were $387.5 million.
Other notable items: the company declared distributions of $0.34 and $0.37 per share for the first and second quarters. The board later declared a third-quarter distribution based on estimated taxable income and a formula that may include capital gains; no fixed per-share amount was disclosed. The revolving facility commitment increased after quarter-end, from $1.04 billion to approximately $1.065 billion. The filing reported no pending or threatened material litigation and no defaults on senior securities. If no exchange listing occurs by the end of the commitment period in August 2025, the board is to use commercially reasonable efforts to wind down or liquidate the company, subject to possible extensions and other conditions.
Important facts for investors to verify
- Whether rising interest income continues to outpace sharply higher funding costs, fees, and incentive compensation.
- Borrower performance, rating migration, non-accrual levels, and the collectability of accrued PIK income.
- The assumptions and sensitivity underlying Level 3 valuations, including large portfolio-company valuation changes.
- Facility availability and covenant headroom, including the ability to fund $387.5 million of unfunded commitments and meet debt maturities.
- Distribution coverage and tax character, the possibility of excise taxes, and the company’s listing or wind-down path before the commitment period ends.