Business Context and Reporting Period
Filing: Form 10-K for the fiscal year ended December 31, 2020, filed March 4, 2021. The filing identifies the registrant as Owl Rock Technology Finance Corp.; the request metadata refers to Blue Owl Technology Finance Corp., reflecting the announced future Blue Owl transaction rather than the legal name in this filing.
The company is an externally managed, non-traded business development company and regulated investment company focused primarily on originating debt and equity investments in U.S. technology-related companies. It generally intends to invest at least 80% of total assets in technology-related businesses and seeks current income from debt investments plus capital appreciation from equity investments.
- Portfolio at December 31, 2020: 52 companies with fair value of approximately $3.1 billion.
- Portfolio composition by fair value: 74.0% first-lien senior secured debt, 6.8% second-lien senior secured debt, 12.7% unsecured debt and 6.5% equity.
- Shares were privately offered and were not listed on a national securities exchange; 100,586,224 shares were outstanding at December 31, 2020.
- Total investor capital commitments were $3.1 billion, including $1.7 billion undrawn.
Financial Results and Key Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total investment income | $173.2 million | $83.7 million | +107% |
| Total expenses | $94.0 million | $52.5 million | +79% |
| Net investment income after taxes | $78.8 million | $31.1 million | +153% |
| Net realized gain | $0.3 million | $1.6 million | Decrease |
| Net unrealized gain | $43.0 million | $(2.0) million | Improvement |
| Net increase in assets from operations | $122.1 million | $30.7 million | +297% |
| Earnings per share | $1.43 | $0.84 | +70% |
| Net asset value per share | $14.88 | $14.70 | +1.2% |
| Total return based on NAV | 7.2% | 5.8% | +1.4 points |
Investment income included $151.0 million of cash interest income, $19.1 million of payment-in-kind interest, $0.4 million of dividend income and $2.7 million of other income. PIK interest increased to approximately 11.2% of interest income from approximately 1.4% in 2019, increasing the portion of reported income not received in cash.
Weighted average total portfolio yield was 7.9% at both fair value and amortized cost. The weighted average yield on debt and income-producing securities increased to 8.3% at fair value from 8.2% in 2019. No debt investments were on non-accrual status at December 31, 2020.
Cash was $82.2 million, compared with $142.4 million at December 31, 2019. Cash used in operating activities was $1.45 billion, primarily reflecting $1.82 billion of investment funding, partly offset by $306.2 million of investment proceeds. Cash provided by financing activities was $1.39 billion, including $655.8 million of net share issuance proceeds and $783.9 million of net debt proceeds, less $49.3 million of distributions paid.
Debt, Liquidity and Capital Resources
| Debt metric | December 31, 2020 | December 31, 2019 |
|---|---|---|
| Total debt, net carrying value | $1.614 billion | $823.8 million |
| Outstanding principal | $1.649 billion | $830.7 million |
| Available debt capacity | $1.089 billion | $223.4 million |
| Asset coverage ratio | 191% | 193% |
| Average daily borrowings | $914.3 million | $479.1 million |
| Average interest rate | 3.68% | 3.76% |
Debt consisted of a $105.8 million subscription credit facility, a $68.3 million revolving credit facility, a $290.0 million SPV asset facility, $985.0 million of unsecured notes due in 2025 and 2026, and $200.0 million of CLO debt. The company has elected to operate with a 150% minimum asset coverage requirement, subject to applicable conditions.
Management stated that cash, $1.7 billion of uncalled investor commitments and $1.1 billion of available debt capacity were expected to be sufficient for near-term investment and operating needs. Unfunded portfolio company commitments totaled $199.5 million, compared with $167.9 million in 2019.
Material Changes Versus the Prior Comparable Period
- Portfolio fair value more than doubled to $3.057 billion from $1.476 billion, while the number of portfolio companies increased from 29 to 52.
- New investment commitments increased to $1.773 billion from $1.430 billion. Funded investments increased to $1.647 billion from $1.215 billion.
- Unsecured debt investments increased from zero to $388.6 million fair value, and equity investments increased from $57.5 million to $198.4 million.
- Debt financing expanded materially through the SPV asset facility, three unsecured note issuances and the CLO 2020-1 securitization.
- Interest expense increased to $38.6 million from $21.7 million, management fees increased to $32.8 million from $22.1 million and incentive fees increased to $13.4 million from $2.6 million.
- Net unrealized performance improved from a $2.0 million loss to a $43.0 million gain, primarily reflecting higher fair values for debt investments and selected outperforming investments.
- Distributions declared increased to $76.8 million, or $0.84 per share, from $30.3 million, or $0.65 per share.
- Industry exposure shifted meaningfully, including increased data and information services exposure to 15.2% from 5.8% and reduced business services exposure to 18.4% from 26.9%.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal earnings guidance. It expected investment income to increase if the portfolio continued to grow, while noting that investment activity and results may vary materially with market conditions, interest rates, repayments and portfolio-specific developments.
COVID-19 caused business disruptions, market volatility, valuation uncertainty and potential liquidity and credit pressure. Management expected portfolio company performance to remain affected during the first quarter of 2021 and focused on preserving capital for existing portfolio companies. The filing states that certain portfolio companies curtailed operations, furloughed employees or deferred capital expenditures, and that additional financial distress or defaults were possible.
- Interest-rate and LIBOR risk: 88.8% of debt investments were floating rate, with a weighted average LIBOR floor of 0.91%. The planned transition away from LIBOR could reduce investment income or increase borrowing costs.
- Leverage risk: Borrowing magnifies gains and losses, may restrict distributions and may require asset sales if asset coverage declines below required levels.
- Valuation risk: Approximately $3.014 billion of investments were Level 3 assets, making reported NAV dependent on unobservable inputs and Board-approved fair-value judgments.
- Liquidity risk: Shares were not publicly traded, transfers were restricted and portfolio investments were generally illiquid.
- Concentration and credit risk: The strategy is concentrated in technology-related companies, including businesses exposed to competition, rapid technological change, regulation and economic downturns.
- PIK and tax risk: PIK and other non-cash income may require distributions and incentive fees despite the absence of corresponding cash receipts.
- Adviser transaction: Owl Rock Capital Group and Dyal announced a merger to form Blue Owl. If completed, the transaction would change control of the Adviser and require shareholder approval of amended advisory and administration agreements.
- CLO risk: The company’s CLO preferred equity is subordinated to CLO debt. Failure of the CLO’s 120% interest coverage test or 156.75% overcollateralization test could divert cash to debt repayment and reduce distributions to the company.
The company reported no material pending or threatened litigation and no material disagreements with its accountants. PricewaterhouseCoopers LLP issued an unqualified audit opinion. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020.
Most Important Facts for Investors to Verify
- Confirm the legal name and post-filing status of the company following the proposed Blue Owl transaction and whether shareholders approved the amended advisory agreements.
- Reconcile NAV and fair value estimates, particularly the $3.014 billion of Level 3 investments and the $43.0 million net unrealized gain.
- Assess the sustainability of earnings and distributions given the $19.1 million of PIK interest and $7.8 million of estimated undistributed ordinary income.
- Review debt maturities, covenants, collateral pledges, CLO coverage tests and the $1.089 billion of reported available debt capacity.
- Monitor COVID-19 effects, non-accruals, borrower defaults, amendments and changes in portfolio company liquidity after December 31, 2020.
- Evaluate concentration in technology-related industries and individual exposures, including the largest portfolio positions and the 17.7% fair-value exposure to food and beverage investments.
- Verify the transition provisions for LIBOR-linked portfolio loans and borrowing facilities.
- Consider the absence of a public trading market, transfer restrictions and the potential for an eventual exchange listing or orderly wind-down if the commitment period expires without a listing.