Blue Owl Technology Finance Corp. (filed as Owl Rock Technology Finance Corp.)
Reporting period: Quarter and six months ended June 30, 2019; filed August 7, 2019. The filing identifies the registrant as Owl Rock Technology Finance Corp. and describes a newly formed BDC that commenced operations in August 2018. No comparable prior-period operating data is presented because the company was recently formed.
Business context
The company is a Maryland business development company managed by Owl Rock Technology Advisors LLC. It invests primarily in senior secured loans and, to a lesser extent, equity securities of technology-related and life sciences companies, principally in the United States. It intends to maintain at least 80% of total assets in technology-related businesses and to qualify as a regulated investment company for tax purposes.
Key financial metrics
| Metric | Three months ended June 30, 2019 | Six months ended June 30, 2019 |
|---|---|---|
| Total investment income | $17.1 million | $26.2 million |
| Interest income | $16.9 million | $25.9 million |
| Total expenses | $10.9 million | $18.9 million |
| Net investment income after taxes | $6.2 million | $7.2 million |
| Net unrealized gain | $0.5 million | $3.2 million |
| Net realized gain | $(0.001) million | $0.1 million |
| Net increase in net assets from operations | $6.7 million | $10.6 million |
| Earnings per share | $0.19 | $0.38 |
- Implied net investment income margin was approximately 36.3% for the quarter and 27.7% for the six-month period, based on net investment income divided by total investment income.
- Net assets were $614.9 million at June 30, 2019, compared with $286.7 million at December 31, 2018. NAV per share increased to $14.74 from $14.53.
- Cash was $165.2 million, compared with $323.0 million at year-end 2018. Interest receivable was $5.0 million.
- Investments at fair value totaled $1.102 billion, compared with $262.8 million at year-end. The portfolio included 23 companies versus six at year-end.
- The portfolio was 92.5% first-lien senior secured debt, 1.8% second-lien senior secured debt, 2.9% unsecured debt and 2.8% equity investments by fair value. Approximately 97.0% of debt investments were floating-rate.
- Weighted-average total portfolio yield was 8.3%; weighted-average yield on debt and income-producing securities was 8.5%.
- All investments were classified as performing and rated investment grade-equivalent category 2 under the company’s internal rating system; no investments were on non-accrual status.
- Debt had a net carrying value of $643.7 million and outstanding principal of $650.7 million. Total committed debt capacity was $980.0 million, with $329.3 million available. Asset coverage was 194%, compared with 195% at December 31, 2018.
- Six-month cash flow from operations was negative $826.3 million, principally reflecting $873.7 million of net investment purchases. Financing activities provided $668.5 million, including $324.5 million from common-share issuances and net debt borrowings.
Material changes versus December 31, 2018
- Investment fair value increased by approximately $839.2 million, driven by substantial new originations and equity investments. The company funded $834.5 million of net investments during the first six months.
- Debt increased from $297.6 million to $643.7 million net carrying value, while capital commitments increased from approximately $1.8 billion to $2.1 billion.
- The portfolio became substantially more diversified by company and industry. Business services, education, healthcare technology and oil and gas represented significant portions of the June 30 portfolio, whereas the year-end portfolio was concentrated primarily in education, professional services and transportation.
- Unfunded portfolio-company commitments increased to $134.9 million from $65.1 million. Management stated that available borrowing capacity and undrawn investor commitments were sufficient to cover these obligations.
- The company issued 21.95 million common shares for approximately $324.5 million during the period and declared distributions of $0.05 and $0.14 per share.
- The Subscription Credit Facility was expanded to a maximum principal amount of $700 million during the period. The filing also states that the Revolving Credit Facility was increased from $280 million to $305 million on July 26, 2019, after the quarter-end.
Outlook, risks and unusual items
- Management expects liquidity to be supported by $165.2 million of cash, approximately $1.5 billion of undrawn investor capital commitments and $329.3 million of available debt capacity.
- The investment portfolio is heavily concentrated in private, illiquid and predominantly Level 3 securities. Fair values depend on management, board and third-party valuation judgments and may differ materially from realizable values in a forced sale.
- Floating-rate investments and floating-rate borrowings create interest-rate exposure. Management estimated that a 100-basis-point increase in base rates would increase annualized net income by approximately $4.0 million, while a 100-basis-point decrease would reduce annualized net income by approximately $4.0 million, subject to stated assumptions.
- The company relies on LIBOR for substantially all floating-rate investments and borrowings. The filing warns that the planned phaseout of LIBOR after 2021 could require renegotiation of portfolio loan agreements and credit facilities and could adversely affect returns.
- Key risks include economic downturns, portfolio-company defaults, reduced investment opportunities, financing availability, leverage, illiquidity, foreign currency exposure, competition, loss of key personnel, regulatory changes and failure to maintain BDC or RIC status.
- Management reported no pending or threatened material litigation, no defaults upon senior securities and effective disclosure controls as of June 30, 2019.
Investor verification points
- Verify the registrant identity and period because the supplied metadata names Blue Owl Technology Finance Corp., while the filing itself names Owl Rock Technology Finance Corp.
- Reconcile the sharp expansion in investments, debt and capital commitments with underwriting quality, portfolio-company leverage, concentration and subsequent valuation changes.
- Review the terms, borrowing-base limitations, maturity triggers and covenants of the Subscription Credit Facility and Revolving Credit Facility.
- Assess the ability to fund $134.9 million of unfunded portfolio commitments while maintaining the 150% minimum asset-coverage requirement and lender covenants.
- Evaluate the effect of LIBOR replacement, interest-rate movements and the company’s reliance on floating-rate assets and liabilities.
- Review Level 3 valuation assumptions, restricted securities and the potential gap between reported NAV and liquidation value.
- Monitor distributions relative to taxable income and the requirements for maintaining RIC status, including potential excise taxes.