Business Context and Reporting Period
Company: Owl Rock Capital Corporation (ORCC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2019
Business Overview: ORCC is a Maryland corporation organized as a Business Development Company (BDC) and a Regulated Investment Company (RIC). It primarily originates and makes loans to, and makes debt and equity investments in, U.S. middle-market companies. The company is managed by Owl Rock Capital Advisors LLC.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2019 | As of Sep 30, 2019 |
|---|---|---|---|
| Total Investment Income | $188.2 million | $515.8 million | N/A |
| Net Investment Income (After Tax) | $137.9 million | $353.5 million | N/A |
| Net Increase in Net Assets from Operations | $118.7 million | $357.8 million | N/A |
| Earnings Per Share (Basic & Diluted) | $0.31 | $1.18 | N/A |
| Total Assets | N/A | N/A | $8.57 billion |
| Total Investments (Fair Value) | N/A | N/A | $8.27 billion |
| Total Debt (Net Carrying Value) | N/A | N/A | $2.46 billion |
| Cash and Restricted Cash | N/A | N/A | $197.6 million |
| Net Assets | N/A | N/A | $5.92 billion |
| Net Asset Value (NAV) Per Share | N/A | N/A | $15.22 |
| Asset Coverage Ratio | N/A | N/A | 334% |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments at fair value increased significantly from $5.78 billion as of December 31, 2018, to $8.27 billion as of September 30, 2019. This growth was driven by capital calls and new originations.
- Revenue Increase: Total investment income for the nine months ended September 30, 2019, rose to $515.8 million from $262.0 million in the same period in 2018, primarily due to the larger investment portfolio.
- Expense Increase: Net operating expenses for the nine months ended September 30, 2019, increased to $160.5 million from $98.6 million in the prior year period. This was largely driven by higher interest expense due to increased average daily borrowings ($2.51 billion vs. $1.48 billion) and a higher average interest rate (4.92% vs. 4.02%).
- Fee Waivers: The company recorded management and incentive fee waivers totaling $31.7 million for the nine months ended September 30, 2019. No such waivers were recorded in the comparable 2018 period.
- Unrealized Gains/Losses: For the nine months ended September 30, 2019, the company reported a net unrealized gain of $2.8 million, compared to a net unrealized gain of $4.3 million in the prior year period. The three-month period ended September 30, 2019, saw a net unrealized loss of $20.7 million.
Guidance, Outlook, and Risks
- Capital Deployment: The company expects investment income to continue to increase as the investment portfolio grows. It maintains sufficient borrowing capacity to cover outstanding unfunded portfolio company commitments ($773.2 million as of September 30, 2019).
- Stock Repurchase Plan: In connection with its July 2019 IPO, the company entered into a 10b5-1 plan to repurchase up to $150 million of its common stock at prices below NAV. The plan commenced on August 19, 2019, and no purchases had been made as of September 30, 2019.
- Distributions: The company declared a distribution of $0.31 per share for shareholders of record on December 31, 2019. It also declared special distributions totaling $0.36 per share payable in 2020.
- Key Risks:
- LIBOR Phase-out: The potential cessation of LIBOR by the end of 2021 could impact the interest rates on the company's floating-rate loans and borrowing costs, requiring renegotiation of credit agreements.
- CLO Structure: The company holds CLO Preferred Shares in a securitization vehicle (CLO I). These shares are subordinated to CLO Debt, meaning the company bears the primary risk of deterioration in the collateral's performance.
- Interest Rate Risk: While 100% of debt investments are floating-rate, changes in base rates affect net investment income. The company uses interest rate swaps to hedge fixed-rate debt.
- Valuation Risk: A significant portion of the portfolio consists of Level 3 investments (illiquid private debt), valued using unobservable inputs, which introduces estimation uncertainty.
Important Facts for Investor Verification
- Fee Waiver Expiration: Verify the terms and expiration date of the management and incentive fee waivers, which significantly reduced expenses in the current period. The waivers are in place for 15 months following the IPO.
- Asset Coverage Ratio: Confirm the company maintains an asset coverage ratio of at least 200% (or 150% under certain conditions) as required by the Investment Company Act of 1940. The ratio was 334% as of September 30, 2019.
- Unfunded Commitments: Review the $773.2 million in unfunded portfolio company commitments and the company's ability to fund them using existing cash and borrowing capacity.
- CLO Exposure: Assess the risk profile of the $596 million CLO transaction, specifically the subordination of the company's equity interest (CLO Preferred Shares) to the senior debt.
- LIBOR Transition: Monitor the company's strategy for transitioning its loan portfolio and credit facilities away from LIBOR as the benchmark is phased out.