Business Context and Reporting Period
The filing is a Form 10-Q for Owl Rock Technology Finance Corp. (the filing text does not use the name “Blue Owl Technology Finance Corp.”), a Maryland business development company and regulated investment company managed by Owl Rock Technology Advisors LLC, an indirect subsidiary of Blue Owl Capital Inc. The company originates debt and equity investments in technology-related companies, primarily in the United States. The report covers the three and nine months ended September 30, 2022; financial statements are unaudited.
Financial Performance and Key Metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total investment income | $130.5 million vs. $85.8 million | $345.5 million vs. $251.2 million |
| Net investment income after taxes | $59.8 million vs. $16.7 million | $192.6 million vs. $85.9 million |
| Net realized and unrealized gain/(loss) | $93.6 million vs. $227.0 million | $(218.2) million vs. $370.9 million |
| Net increase/(decrease) in net assets from operations | $153.4 million vs. $243.7 million | $(25.5) million vs. $456.8 million |
| Earnings/(loss) per share | $0.76 vs. $1.69 | $(0.13) vs. $3.73 |
- Investment income increased primarily from portfolio growth and higher base rates. Nine-month interest income was $253.0 million, including $65.1 million of payment-in-kind interest.
- PIK interest and dividends represented 26.3% of investment income in the quarter and 25.5% year to date, increasing reliance on non-cash income.
- Net investment income before taxes was $61.9 million for the quarter and $200.1 million year to date. Reported expenses were $68.6 million and $145.3 million, respectively; the filing does not present a conventional operating margin.
- Net assets were $3.387 billion at September 30, 2022, compared with $3.532 billion at December 31, 2021. NAV per share declined to $16.77 from $17.65.
- Investments at fair value were $6.257 billion, compared with $6.139 billion at year-end. The portfolio included 112 companies and was concentrated in systems software, application software and health care technology.
- Cash was $41.5 million. Debt had a net carrying value of $2.825 billion and outstanding principal of $2.853 billion. Available debt capacity was $611.9 million, and asset coverage was 218% versus 231% at December 31, 2021.
- Net cash used in operating activities was $188.1 million, including $921.9 million of investment purchases and $643.2 million of investment proceeds and repayments. Financing activities provided $122.6 million, resulting in a $65.5 million decrease in cash.
- The company declared distributions of $0.28, $0.23 and $0.24 per share during the nine months. A portion of the $0.28 and $0.23 distributions was expected to be funded from sources other than ordinary income, including undistributed long-term capital gains.
Material Changes Versus Prior Comparable Period
- Quarterly investment income rose 52% and nine-month investment income rose 38%, while quarterly net investment income after taxes rose 258% and nine-month net investment income after taxes rose 124%.
- Interest expense increased to $34.9 million for the quarter and $90.7 million year to date from $25.0 million and $67.3 million, respectively, reflecting higher average borrowings and interest rates. The average interest rate increased to 4.8% in the quarter and 4.2% year to date.
- Incentive fees declined materially year to date to $3.7 million from $50.8 million, primarily because of portfolio unrealized losses and a reversal of previously accrued capital-gains incentive fees.
- Net unrealized gains of $93.2 million in the quarter were more than offset year to date by net unrealized losses of $259.7 million, primarily from market conditions. The portfolio’s debt fair value declined to 98.0% of principal from 99.1% at year-end.
- Portfolio fair value increased modestly, but the mix shifted toward unsecured debt and preferred equity. First-lien debt fair value increased to $4.116 billion from $4.043 billion, while common equity fair value declined to $428.9 million from $548.0 million.
- Debt outstanding increased by approximately $177.5 million from year-end, while available capacity remained broadly stable at $611.9 million versus $608.8 million.
- New investment commitments fell sharply to $333.5 million in the quarter from $1.364 billion. Management attributed slower activity to rapidly rising rates, reduced refinancing activity and market uncertainty.
Guidance, Outlook, Commentary and Risks
- Management expects repayments and originations to remain modest under current market conditions, but believes rising rates should meaningfully benefit net investment income as rates exceed portfolio floors.
- Management stated that credit quality remained consistent and that it was emphasizing recession-resistant, familiar sectors, including software and other service-oriented businesses.
- Approximately 97.3% of debt investments at fair value carried floating rates. Management disclosed an annualized sensitivity of approximately $36.4 million of incremental net income for a 100-basis-point increase in base rates, before income-based fees, assuming no portfolio or borrowing changes.
- Non-accrual debt investments had amortized cost of $33.9 million, or 0.7% of debt investments, compared with none at December 31, 2021. One loan, Walker Edison Furniture Company, was identified as being on non-accrual status.
- Unfunded portfolio company commitments increased to $416.4 million from $390.8 million. Management stated that available borrowing capacity and financial resources were sufficient to fund these commitments.
- Material risks include valuation uncertainty for predominantly Level 3 investments, credit losses, leverage and refinancing risk, rising interest rates, inflation, recession, supply-chain disruption, COVID-19 effects, foreign currency exposure, LIBOR transition, geopolitical risks and the speculative and illiquid nature of the portfolio.
- Restricted securities represented $1.160 billion, or 34.2% of net assets. Non-qualifying assets represented 23.9% of total assets for BDC regulatory purposes.
- The company remains subject to RIC distribution requirements and accrued $7.5 million of excise tax for the nine months. On November 1, 2022, the Board declared a distribution based on 90% of estimated fourth-quarter taxable income, plus potential additional capital gains.
- No material litigation was reported, no defaults upon senior securities were reported, and management concluded that disclosure controls were effective.
Most Important Facts for Investors to Verify
- Confirm the registrant’s legal name and whether the requested “Blue Owl Technology Finance Corp.” refers to this Owl Rock Technology Finance Corp. filing.
- Assess the sustainability and cash conversion of net investment income given that PIK income represented 25.5% of year-to-date investment income.
- Review valuation marks, Level 3 assumptions and the $259.7 million year-to-date unrealized loss, particularly for equity investments.
- Monitor non-accrual exposure, portfolio rating migration and the company’s ability to fund $416.4 million of unfunded commitments.
- Evaluate leverage, asset coverage, debt maturities and the $611.9 million of borrowing capacity under adverse market and valuation scenarios.
- Verify the tax character and funding sources of distributions, including any return of capital or undistributed capital gains.
- Review exposure to LIBOR transition, floating-rate assets, variable-rate debt and the effect of further interest-rate increases on both income and borrowing costs.