Blue Owl Technology Finance Corp. (filed as Owl Rock Technology Finance Corp.) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance sheet compared with December 31, 2022. The company is a BDC focused primarily on debt and equity investments in technology-related companies. Its adviser is an indirect affiliate of Blue Owl Capital.
Financial and portfolio highlights
| Metric | Q1 2023 / March 31, 2023 | Prior comparable / December 31, 2022 |
|---|---|---|
| Investment income | $161.5 million | $107.5 million in Q1 2022 |
| Net investment income after taxes | $81.6 million | $65.3 million in Q1 2022 |
| Net realized and unrealized result | $15.3 million gain | $100.6 million loss in Q1 2022 |
| Net increase in assets from operations | $96.9 million; $0.48 per share | $35.3 million decrease; $(0.18) per share in Q1 2022 |
| Net asset value (NAV) per share | $16.83 | $16.70 at December 31, 2022 |
| Portfolio investments at fair value | $6.52 billion | $6.41 billion at December 31, 2022 |
| Debt, net carrying value | $3.21 billion | $3.16 billion at December 31, 2022 |
| Cash | $218.3 million | $203.3 million at December 31, 2022 |
| Quarterly distribution declared | $0.34 per share | $0.24 per share in Q1 2022 |
Income, expenses and margins: Interest income was $120.8 million and PIK interest income was $30.1 million. Total expenses rose to $76.8 million from $40.1 million, led by interest expense of $48.2 million versus $27.1 million. Average borrowing costs increased to 5.8% from 3.7%, while average daily borrowings rose to $3.21 billion from $2.75 billion. Net investment income after taxes was approximately 9.6% of average net assets, versus 7.5% a year earlier; total expenses were 9.4% versus 4.8% (annualized ratios).
Cash flow and liquidity: Operating activities provided $12.2 million; financing activities provided $2.8 million; cash increased $15.0 million. At quarter-end the company reported $430.2 million of available revolving capacity and 205% asset coverage, compared with 206% at year-end. Management said cash and available debt capacity should meet near-term investment and operating needs. Unfunded portfolio commitments were $377.8 million, down from $390.3 million.
Portfolio and valuation: The company held investments in 121 portfolio companies. At fair value, the portfolio was 65.7% first-lien senior secured debt, 8.3% second-lien debt, 5.8% unsecured debt, 12.8% preferred equity and 7.4% common equity. Weighted-average total portfolio yield was 10.2%, up from 9.8% at year-end; 97.2% of debt investments were floating-rate. Approximately $6.14 billion of investments were Level 3, relying on significant unobservable valuation inputs.
Material changes and management commentary
- Investment income increased 50% year over year, principally reflecting a larger debt portfolio and higher base rates. Expenses also rose materially, especially borrowing costs.
- New investment commitments fell to $33.2 million from $296.4 million a year earlier; principal funded was $29.5 million versus $260.4 million. Management attributed subdued activity to rising rates, reduced refinancing and market uncertainty, and expected repayments and originations to remain modest under current conditions.
- Management said higher rates should benefit net investment income as rates exceed investment floors, but warned that a prolonged recession could weaken portfolio company results. It reported no broad deterioration at the time of filing and continued to monitor banking-sector and market volatility.
- Unrealized gains of $30.8 million contrasted with unrealized losses of $104.9 million in Q1 2022. Realized investment losses were $15.5 million, versus realized gains of $4.2 million in Q1 2022. The quarter’s unrealized gain was attributed mainly to market conditions and reversals of prior unrealized losses associated with restructurings.
- PIK interest and dividend income was $39.1 million, or 24.2% of investment income, compared with $25.2 million, or 23.5%, a year earlier. PIK accruals are not cash receipts. One portfolio company’s loans, Walker Edison, remained on non-accrual; non-accrual debt amortized cost totaled $12.7 million, down from $33.9 million at year-end.
- On March 30, 2023, the commitment for SPV Asset Facility I was increased from $450 million to $600 million. The company’s $0.34 distribution was identified as payable partly from sources other than ordinary income, including undistributed long-term capital gains. A subsequent-event declaration on May 9 provided for a Q2 distribution based on estimated taxable income and, conditionally, net capital gains; it did not specify a fixed per-share amount.
Outlook, risks and contingencies
The filing provides no fixed earnings or investment-activity guidance. Key risks include borrower credit deterioration, defaults and lower recoveries; rising funding costs and interest-rate volatility; illiquid investments and fair-value estimation uncertainty; concentration in technology-related sectors; foreign-currency exposure; and reliance on secured facilities subject to borrowing-base tests and covenants. The company also identifies inflation, recession risk, banking-system instability, geopolitical events and potential constraints on capital-market access. It reported no pending or threatened material litigation and no defaults upon senior securities.
Important facts for investors to verify
- How much reported income depends on non-cash PIK accruals, and whether those amounts are ultimately collected.
- Portfolio credit trends, including Walker Edison’s non-accrual status, rating changes and any further restructurings.
- Valuation assumptions for the predominantly Level 3 portfolio and the sensitivity of NAV to yields, multiples and borrower performance.
- Debt costs, asset coverage, borrowing-base availability and capacity to fund $377.8 million of unfunded commitments while maintaining distributions.
- The source and sustainability of distributions, including the portion not funded from ordinary income, and the effect of modest originations and repayments on future income.