Business Context and Reporting Period
Owl Rock Technology Finance Corp. (the filing predates the Blue Owl name) filed an unaudited Form 10-Q for the quarter ended March 31, 2020, compared primarily with March 31, 2019 and December 31, 2019. 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 March 31, 2020, the portfolio comprised 34 companies with investments at fair value of $1.8 billion. The portfolio was 84.0% first-lien senior secured debt, 6.6% second-lien senior secured debt, 5.5% unsecured debt and 3.9% equity investments. Approximately 94.2% of debt investments at fair value had floating interest rates.
Key Financial Metrics
| Metric | March 31, 2020 / Quarter | Comparable Period or Prior Date |
|---|---|---|
| Total investment income | $34.7 million | $9.1 million in Q1 2019 |
| Net investment income after taxes | $15.8 million | $1.0 million in Q1 2019 |
| Net change in unrealized gains/losses | $(56.0) million | $2.8 million gain in Q1 2019 |
| Net realized gain/loss | $(0.03) million | $0.1 million gain in Q1 2019 |
| Net decrease in assets from operations | $(40.2) million | $3.9 million increase in Q1 2019 |
| Basic and diluted earnings per share | $(0.70) | $0.19 in Q1 2019 |
| Net asset value per share | $13.76 | $14.70 at December 31, 2019 |
| Total investments at fair value | $1.831 billion | $1.476 billion at December 31, 2019 |
| Cash | $132.2 million | $142.4 million at December 31, 2019 |
| Debt, net of issuance costs | $970.3 million | $823.8 million at December 31, 2019 |
| Asset coverage ratio | 192% | 193% at December 31, 2019 |
| Weighted-average total portfolio yield | 7.9% | 7.9% at December 31, 2019 |
Operating cash flow was $(357.9) million, primarily reflecting $480.9 million of investment purchases and $71.1 million of investment proceeds. Financing activities provided $347.8 million, including $209.8 million from share issuances and $146.5 million of net debt borrowings, partly offset by $8.4 million of distributions paid.
Total expenses increased to $18.7 million from $8.1 million, including interest expense of $7.6 million, management fees of $7.4 million and incentive fees of $1.8 million. The ratio of total expenses to average net assets was 8.8%, while the annualized ratio of net investment income to average net assets was 7.4%.
Material Changes Versus Prior Period
- Investment income increased 281% year over year to $34.7 million, driven mainly by substantial portfolio growth; the weighted-average portfolio yield declined from 8.4% at March 31, 2019 to 7.9% at March 31, 2020.
- The company reported a $56.0 million unrealized loss, compared with a $2.8 million unrealized gain in Q1 2019. Management attributed the loss primarily to COVID-19-related market conditions and widening credit spreads. Debt investments were valued at 95.1% of principal at March 31, 2020, versus 98.5% at December 31, 2019.
- Net asset value per share declined from $14.70 to $13.76 during the quarter, and total return was negative 5.0%, compared with positive 1.5% in Q1 2019.
- The investment portfolio grew from $1.476 billion to $1.831 billion at fair value. New investment commitments totaled $432.0 million, investments funded totaled $412.1 million, and investments sold or repaid totaled $67.3 million.
- Outstanding principal debt increased from $830.7 million to $976.5 million. Available debt capacity declined from $223.4 million to $168.1 million, primarily because revolving facility borrowings increased.
- Unfunded portfolio company commitments declined from $167.9 million to $110.1 million, while total investor capital commitments increased from approximately $2.5 billion to $2.7 billion, including $1.8 billion undrawn.
Guidance, Outlook, Risks and Unusual Items
Management did not provide numerical earnings guidance. It expected portfolio company performance to remain affected by COVID-19 during the quarter ending June 30, 2020 and stated that it was prioritizing preservation of liquidity and available capital for existing portfolio companies.
- Management expected COVID-19 could cause financial distress, defaults, reduced interest payments, permanent investment impairments, lower net investment income and reduced future distributions.
- All debt investments were reported as performing and no investments were on non-accrual status at March 31, 2020. However, 97.0% of the portfolio was rated 2, with only 3.0% rated 1; no investments were rated 3, 4 or 5.
- Most investments were Level 3 assets valued using significant unobservable inputs. Fair values may differ materially from eventual realizable values, particularly in a forced sale or prolonged market disruption.
- The company relies on leverage and must maintain regulatory asset coverage. Its facilities had $976.5 million of principal outstanding against $1.205 billion of commitments, with maturities generally within one to three years.
- Interest-rate and LIBOR-transition risk are material because most debt investments and borrowings use floating rates. The filing notes that LIBOR may be discontinued after 2021 and that replacement terms could reduce investment income or increase borrowing costs.
- Restricted securities had aggregate fair value of approximately $172.2 million, or 18.4% of net assets. Total unfunded portfolio commitments were $110.1 million.
- The company declared a $0.21 per-share distribution for the quarter and subsequently declared a distribution equal to 90% of estimated first-quarter taxable income and net capital gains, if any. It accrued $187,000 of federal excise tax.
- Subsequent to quarter-end, the company completed a $150.0 million capital drawdown and announced an additional approximately $275.0 million drawdown expected to close around May 19, 2020.
- The SEC issued an April 8, 2020 exemptive order allowing qualifying BDCs to make certain additional co-investments with affiliated funds through December 31, 2020, subject to conditions.
Important Facts for Investors to Verify
- Whether COVID-19-related valuation declines, defaults, non-accruals or amendments increased after March 31, 2020.
- The recoverability of the $1.831 billion fair value portfolio, particularly the Level 3 investments and the 95.1% debt fair-value-to-principal ratio.
- Liquidity after the reported post-quarter-end capital drawdowns, including remaining debt capacity, investor commitments and unfunded portfolio commitments.
- Compliance with credit-facility covenants and the 150% minimum regulatory asset-coverage requirement.
- The effect of lower base rates, LIBOR replacement and any interest-rate floors on net investment income and borrowing costs.
- Whether the $0.21 per-share distribution and subsequent distribution declaration were fully supported by taxable income and recurring cash earnings.
- Potential conflicts and allocation effects from co-investments with affiliated Owl Rock funds and related-party management and administration fees.