Business context and reporting period
This is Owl Rock Capital Corporation’s Form 10-K for the fiscal year ended December 31, 2022, filed February 22, 2023. The registrant is a U.S. middle-market lender and externally managed BDC/RIC, traded as ORCC; it is affiliated with Blue Owl Capital. The filing covers the full year and provides unaudited quarterly results, including the fourth quarter.
Financial and portfolio results
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Investment income | $1.202 billion | $1.021 billion |
| Operating expenses | $639.5 million | $527.3 million |
| Net investment income after tax | $556.7 million | $490.1 million |
| Net realized and unrealized gains (losses) | $(90.4) million | $134.7 million |
| Increase in net assets from operations | $466.4 million | $624.9 million |
| Basic and diluted earnings per share | $1.18 | $1.59 |
| Net asset value per share, year-end | $14.99 | $15.08 |
| Weighted-average portfolio yield at fair value | 11.0% | 7.7% |
| Distributions declared per share | $1.29 | $1.24 |
FY 2022 investment income rose 17.7%, primarily as the portfolio yield increased with higher base rates. Expenses rose 21.3%, including higher interest expense, management fees and incentive fees. Net investment income after tax increased 13.6%, but total operating results fell as market-driven unrealized losses replaced the prior year’s unrealized gains. NAV per share declined from $15.08 to $14.99. The filing’s selected-data table shows 2022 EPS of $1.19, while the audited statements show $1.18; investors should verify the applicable figure and calculation.
Fourth-quarter investment income was $350.5 million, net investment income was $162.5 million, and the increase in net assets from operations was $191.9 million. Q4 ending NAV was $14.99 per share.
- Portfolio: Fair value was $13.01 billion across 184 portfolio companies, versus $12.74 billion across 143 companies a year earlier. At fair value, the portfolio was 71.4% first-lien debt, 14.3% second-lien debt, 1.9% unsecured debt, 2.7% preferred equity, 7.5% common equity and 2.2% investment funds and vehicles.
- Credit performance: Debt investments at fair value were 97.0% of principal, down from 98.2%. Non-accrual debt was 1.9% of debt amortized cost, versus 0.2% in 2021. The portfolio rating table showed 0.4% at rating 5 and 0.8% at rating 4, versus none and 0.1%, respectively, in 2021.
- Cash flow: Cash provided by operating activities was $217.3 million, compared with $1.23 billion used in 2021; investment purchases and repayments were substantial and make period-to-period operating cash flow variable. Financing activities used $219.3 million, including $488.4 million of cash distributions, partly offset by net borrowings.
- Liquidity and leverage: Cash and restricted cash totaled $445.1 million; debt-facility availability was $1.353 billion. Outstanding principal was $7.443 billion and net carrying value was $7.282 billion. Asset coverage was 179%, versus 182% in 2021, and debt-to-equity leverage was 1.19x, within the stated 0.90x–1.25x target range. Weighted-average debt cost was 3.7%, versus 3.0%.
- Rates and PIK: 98.3% of debt investments at fair value were floating rate. PIK interest income was $113.3 million; the filing states PIK interest and dividend income together were 11.6% of investment income, compared with 6.4% in 2021.
Material changes versus the prior period
- Investment yield increased as benchmark rates rose, but higher borrowing costs contributed to interest expense increasing to $307.5 million from $219.1 million.
- Investment fair value fell $88.4 million before related tax and currency effects, compared with a $192.4 million gain in 2021. Realized investment results improved to a $5.1 million gain from a $46.3 million loss.
- New investment commitments declined to $1.77 billion from $6.82 billion; funded investments fell to $1.18 billion from $5.84 billion. The portfolio nevertheless grew modestly in fair value and company count.
- Internet software and services remained the largest industry exposure, increasing to 13.3% of portfolio fair value from 11.3%. Insurance represented 9.3%, compared with 8.8%.
- The company completed a $350.5 million CLO VII transaction, refinanced CLO V, terminated SPV Asset Facility IV, and amended its revolving credit facility. The revolving facility’s maximum principal amount increased to $1.855 billion, subject to borrowing-base availability.
Outlook, risks and unusual items
- Management said rising rates were expected to benefit investment income as rates exceeded portfolio floors, while acknowledging that higher borrower interest costs could pressure portfolio-company performance. It reported no broad deterioration at the filing date, but cautioned that a prolonged recession could weaken borrowers.
- Management reported lower merger-and-acquisition activity, repayments and originations amid rapidly rising rates and market uncertainty. It expected repayments to increase if the rate environment stabilized and described the direct-lending environment as favorable for negotiating spreads, call protection and credit terms.
- Key risks include borrower defaults, inflation and recession, illiquid investments and valuation uncertainty, leverage and refinancing needs, rising funding costs, and competition. The company also disclosed conflicts from the Adviser’s management of other funds, allocation of opportunities and co-investments with affiliates.
- Most investments are privately valued. Beginning in Q4 2022, the Board designated the Adviser as valuation designee for investments without readily available market quotations. KPMG identified fair valuation as a critical audit matter; the auditor nevertheless gave an unqualified opinion on the financial statements and reported effective internal control over financial reporting.
- LIBOR transition remains a risk: the company had material LIBOR-linked contracts while the remaining U.S. dollar LIBOR settings were scheduled to end after June 30, 2023. The company reported that most new investments were indexed to SOFR.
- Unfunded investment commitments were $926.1 million, down from $963.8 million. The filing said resources were adequate to meet them. The company recorded $5.8 million of income-tax expense, including excise tax, and $2.6 million of non-recurring interest expense related to terminating SPV Asset Facility IV.
- For 2023, the Board declared a regular first-quarter dividend of $0.33 per share and a supplemental dividend of $0.04 per share. The filing provides no earnings or NAV guidance.
Important facts for investors to verify
- Reconcile the $1.18 audited EPS with the $1.19 shown in the selected-data table.
- Review non-accrual loans, rating-4/5 exposures, and the significant valuation markdowns in individual portfolio holdings; assess the assumptions supporting Level 3 valuations.
- Confirm borrowing-base availability, covenant headroom, refinancing plans and maturities, particularly the 2024–2027 unsecured notes and revolving commitments.
- Assess whether increased floating-rate income and distributions are sustainable after accounting for higher financing costs, PIK income and borrower credit risk.
- Review the $926.1 million of unfunded commitments, affiliate co-investment allocations, and the remaining authorization under the $150 million share repurchase program.