Business Context and Reporting Period
Company: Owl Rock Capital Corporation (ORCC)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2020
Business Overview: ORCC is a Business Development Company (BDC) and Regulated Investment Company (RIC) focused on originating and making senior secured loans, subordinated loans, and mezzanine loans to U.S. middle-market companies. The company also makes limited equity investments. As of June 30, 2020, the portfolio consisted of 102 portfolio companies with an aggregate fair value of $9.2 billion.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | Dec 31, 2019 (Balance Sheet) |
|---|---|---|---|
| Total Investment Income | $190.2 million | $395.0 million | N/A |
| Net Investment Income (After Tax) | $129.2 million | $275.4 million | N/A |
| Net Operating Expenses (Net of Waivers) | $61.7 million | $118.1 million | N/A |
| Net Change in Unrealized Gain (Loss) | $174.5 million | $(284.7) million | N/A |
| Net Increase (Decrease) in Net Assets from Operations | $303.6 million | $(9.0) million | N/A |
| Earnings Per Share (Basic & Diluted) | $0.79 | $(0.02) | N/A |
| Total Assets | $9.50 billion | N/A | $9.20 billion |
| Total Debt (Net Carrying Value) | $3.49 billion | N/A | $3.04 billion |
| Cash and Restricted Cash | $188.0 million | N/A | $317.2 million |
| Net Asset Value (NAV) Per Share | $14.52 | N/A | $15.24 |
| Asset Coverage Ratio | 247% | N/A | 293% |
Material Changes vs. Prior Period
- Investment Income Growth: Total investment income increased to $190.2 million for the three months ended June 30, 2020, from $176.1 million in the prior year period. This was driven by a larger investment portfolio (par value increased from $7.4 billion to $9.7 billion), partially offset by a decrease in the portfolio's weighted average yield (from 9.1% to 7.5%).
- Unrealized Gains/Losses Volatility: The company reported a net unrealized gain of $174.5 million for the three months ended June 30, 2020, reversing a significant net unrealized loss of $284.7 million for the six-month period. The six-month loss was primarily driven by widening credit spreads and market conditions related to the COVID-19 pandemic in Q1, while Q2 saw improved market conditions and tightening spreads.
- Expense Increases: Net operating expenses increased to $61.7 million (Q2 2020) from $56.7 million (Q2 2019). This increase was due to higher management fees (driven by asset growth), professional fees, and interest expense. However, the company waived $39.9 million in management and incentive fees for the quarter.
- Debt Expansion: Total debt increased from $3.04 billion at year-end 2019 to $3.49 billion at June 30, 2020. This included the issuance of $500 million in July 2025 Notes and the completion of CLO III and CLO IV transactions.
Guidance, Outlook, and Risks
- COVID-19 Impact: Management expects portfolio companies to continue to be adversely impacted by the pandemic. While some companies have curtailed operations or furloughed employees, the company has executed loan amendments to provide liquidity, sometimes via payment-in-kind (PIK) interest. Originations decreased in Q2 2020 reflecting lower private equity deal activity.
- Fee Waiver Expiration: The incentive fee waiver, which has been in place since the IPO, is scheduled to expire in October 2020. Management does not intend to extend or renew the waiver at that time.
- Asset Coverage: Effective June 9, 2020, the company's asset coverage requirement for senior securities was reduced from 200% to 150% following shareholder approval. The current target ratio is 0.90x-1.25x.
- Stock Repurchase Plan: The company exhausted its $150 million 10b5-1 stock repurchase plan on August 4, 2020, having repurchased approximately 12.5 million shares at an average price of roughly $12.00 per share.
- Risks: Key risks include the duration and severity of the economic downturn caused by COVID-19, potential defaults by portfolio companies, interest rate volatility (including the transition from LIBOR), and the ability to access capital markets.
Investor Verification Checklist
- Fee Waiver Status: Verify the exact expiration date of the management and incentive fee waivers and the projected impact on Net Investment Income once they lapse in October 2020.
- Non-Accrual Loans: Review the specific portfolio companies placed on non-accrual status (2.1% of debt portfolio at amortized cost) and the adequacy of reserves.
- Credit Quality Migration: Analyze the increase in investments rated 3 and 4 (13.0% of portfolio) compared to the prior year, specifically attributing changes to COVID-19 versus underlying performance.
- Liquidity Position: Confirm the availability of the $1.7 billion in committed credit facilities and the sufficiency of cash reserves to meet unfunded commitments ($658.6 million) and debt service obligations.
- Unrealized Valuation: Scrutinize the methodology for the $174.5 million unrealized gain in Q2, given the significant swing from the Q1 loss, to understand the sensitivity to credit spread assumptions.