Business Context and Reporting Period
Company: Owl Rock Capital Corporation (Owl Rock)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2019
Business Overview: Owl Rock is a Maryland corporation organized as a Business Development Company (BDC) and a Regulated Investment Company (RIC). Its primary objective is to originate and make loans to, and make debt and equity investments in, U.S. middle-market companies. The company is managed by Owl Rock Capital Advisors LLC.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total Investment Income | $151.5 million | $65.4 million |
| Total Expenses | $53.8 million | $26.7 million |
| Net Investment Income (After Taxes) | $96.0 million | $38.7 million |
| Net Increase in Net Assets from Operations | $114.5 million | $44.3 million |
| Earnings Per Share (Basic & Diluted) | $0.49 | $0.44 |
| Net Asset Value (NAV) Per Share | $15.26 | $15.10 |
| Total Investments (Fair Value) | $6.83 billion | $5.78 billion |
| Total Debt (Net Carrying Value) | $2.77 billion | $2.57 billion |
| Cash and Restricted Cash | $98.8 million | $127.6 million |
| Asset Coverage Ratio | 245% | 225% |
Material Changes vs. Prior Period
- Portfolio Growth: The investment portfolio grew significantly, with total investments at fair value increasing from $5.78 billion in Q1 2018 to $6.83 billion in Q1 2019. This was driven by gross originations of $927 million and net capital drawdowns of $750 million during the quarter.
- Revenue Expansion: Total investment income more than doubled to $151.5 million, primarily due to the larger portfolio size and increased interest income ($146.4 million vs. $61.3 million).
- Expense Increase: Total expenses rose to $53.8 million from $26.7 million. This increase was driven by higher interest expense ($34.7 million vs. $12.1 million) due to increased leverage (average daily borrowings of $2.77 billion vs. $1.15 billion) and higher management fees ($15.2 million vs. $12.0 million).
- Unrealized Gains: The company recorded a net unrealized gain of $18.5 million, compared to $5.4 million in the prior year, largely due to an increase in the fair value of debt investments.
Guidance, Outlook, and Risks
Management Commentary: Management highlighted a robust middle-market lending environment with limited capital availability, creating attractive pricing dynamics. The company continues to focus on direct originations of senior secured loans. The weighted average yield of the portfolio remained stable at 9.4%.
Subsequent Events: On April 10, 2019, the company issued $400 million in aggregate principal amount of 5.25% notes due in 2024 (2024 Notes). Proceeds were used to pay down the Subscription Credit Facility. The company also entered into interest rate swaps to hedge the fixed-rate notes.
Risks and Contingencies:
- Interest Rate Risk: 99.6% of the debt portfolio is floating rate. While this protects against rising rates, a decline in rates could reduce net investment income if borrowing costs do not adjust proportionally.
- Liquidity and Capital: The company relies on capital drawdowns from investors ($1.6 billion undrawn as of March 31, 2019) and credit facilities ($290.7 million available) to fund operations and commitments.
- Valuation Risk: Substantially all investments are Level 3 (unobservable inputs), requiring fair value determination by the Board, which introduces subjectivity.
- Regulatory: The company must maintain RIC status to avoid corporate-level taxes, requiring the distribution of at least 90% of investment company taxable income.
Investor Verification Checklist
- Verify the sustainability of the 9.4% portfolio yield given the competitive middle-market lending environment.
- Monitor the utilization of the $1.6 billion in undrawn capital commitments and the timing of the planned IPO, which would terminate these commitments.
- Assess the impact of the new $400 million 2024 Notes issuance on future interest expense and leverage ratios.
- Review the concentration of the portfolio, noting that the top 10 investments represent a significant portion of total assets.
- Confirm the company's ability to maintain its 200% asset coverage ratio required under the 1940 Act as it continues to deploy capital.