Business Context and Reporting Period
Company: Owl Rock Capital Corporation (Owl Rock)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2017
Business Model: Owl Rock is an externally managed, closed-end, non-diversified management investment company regulated as a Business Development Company (BDC) and a Regulated Investment Company (RIC). It focuses on originating and making senior secured, unsecured, subordinated, and mezzanine loans to U.S. middle-market companies. The company is managed by Owl Rock Capital Advisors LLC.
Key Financial Metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Total Investment Income | $159.9 million | $28.8 million |
| Total Expenses | $65.9 million | $19.4 million |
| Net Investment Income (After Tax) | $93.8 million | $9.0 million |
| Total Net Assets | $1,472.6 million | $680.5 million |
| Net Asset Value (NAV) per Share | $15.03 | $14.85 |
| Total Debt (Net Carrying Value) | $919.4 million | $491.9 million |
| Asset Coverage Ratio | 258% | 237% |
| Portfolio Fair Value | $2,389.8 million | $967.4 million |
| Weighted Average Portfolio Yield | 8.8% | 9.0% |
| Distributions Declared per Share | $1.35 | $0.06 |
Material Changes vs. Prior Period
- Portfolio Growth: The investment portfolio more than doubled in fair value, increasing from $967.4 million in 2016 to $2,389.8 million in 2017. The number of portfolio companies grew from 21 to 40.
- Revenue Expansion: Total investment income surged to $159.9 million from $28.8 million, driven primarily by a larger portfolio and increased interest income ($151.2 million vs. $27.9 million).
- Expense Increase: Total expenses rose to $65.9 million from $19.4 million. This was largely due to higher management fees ($31.1 million vs. $9.2 million) and interest expense ($24.6 million vs. $2.8 million) associated with increased leverage.
- Debt Financing: Total debt outstanding increased significantly to $932.0 million (principal) from $495.0 million. New facilities added in 2017 included a $400 million Revolving Credit Facility, a $400 million SPV Asset Facility, and $150 million in 2023 Senior Unsecured Notes.
- Capital Raise: The company issued approximately 49.6 million shares in 2017, raising $749.9 million in capital drawdowns, compared to 45.8 million shares and $665.3 million in 2016.
Guidance, Outlook, and Risks
Management Commentary & Outlook: Management believes the middle-market lending environment offers attractive opportunities due to limited capital availability from traditional banks and robust demand for debt capital. The company intends to continue originating loans to U.S. middle-market companies to generate current income and capital appreciation. No specific quantitative financial guidance for future periods was provided in the text.
Key Risks and Contingencies:
- Liquidity Risk: Investments are primarily in illiquid private companies. There is no established public market for the company's common stock, and shares cannot be sold without Adviser consent prior to an Exchange Listing.
- Interest Rate Risk: Approximately 98.4% of the debt portfolio is floating-rate. While this protects against rising rates, a decline in rates could reduce net investment income. The company uses interest rate swaps to hedge fixed-rate debt.
- Leverage Risk: The company utilizes borrowings to finance investments. A decline in asset values could impair the ability to meet asset coverage ratios (required to be at least 200%), potentially restricting distributions or requiring asset sales.
- Adviser Dependency: The company has no employees and relies entirely on the Adviser for operations. Conflicts of interest exist as the Adviser manages other funds (e.g., Owl Rock Capital Corporation II) with similar strategies.
- Tax Status: The company must distribute at least 90% of investment company taxable income to maintain RIC status and avoid corporate-level taxation. Failure to do so could result in significant tax liabilities.
Investor Verification Checklist
- Capital Commitments: Verify the status of the $5.5 billion in total investor capital commitments and the $3.7 billion remaining undrawn as of year-end 2017.
- Debt Covenants: Review the specific financial covenants and borrowing base limitations of the Subscription Credit Facility, Revolving Credit Facility, and SPV Asset Facility.
- Valuation Methodology: Confirm the Board's fair value determination process for Level 3 assets, which constitute the vast majority of the portfolio.
- Related Party Transactions: Examine the terms of the Investment Advisory Agreement (0.75% management fee pre-listing) and the joint venture with The Regents of the University of California (Sebago Lake LLC).
- Exchange Listing Timeline: Monitor progress toward an Exchange Listing, as the company faces a potential wind-down if not listed by the five-year anniversary of the Initial Closing (March 2021), subject to extensions.