Business Context and Reporting Period
Blue Owl Technology Finance Corp. was named Owl Rock Technology Finance Corp. in this filing. The company is a Maryland business development company and regulated investment company that originates debt and equity investments primarily in U.S. technology-related companies. This unaudited Form 10-Q covers the three months ended March 31, 2021; the balance-sheet comparison date is December 31, 2020.
At March 31, 2021, the company had 55 portfolio companies and $3.2 billion of investments at fair value. Its portfolio was 71.9% first-lien senior secured debt, 4.2% second-lien senior secured debt, 13.7% unsecured debt and 10.2% equity investments, based on fair value.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2021 | Comparable Period / Prior Date |
|---|---|---|
| Total investment income | $66.5 million | $34.7 million in Q1 2020 |
| Net investment income after taxes | $25.4 million | $15.8 million in Q1 2020 |
| Net increase in net assets from operations | $68.3 million | $(40.2) million in Q1 2020 |
| Earnings per share | $0.66 | $(0.70) in Q1 2020 |
| Net asset value per share | $15.32 | $14.88 at December 31, 2020 |
| Net assets | $1.79 billion | $1.50 billion at December 31, 2020 |
| Investments at fair value | $3.22 billion | $3.06 billion at December 31, 2020 |
| Total expenses | $40.6 million | $18.7 million in Q1 2020 |
| Net investment income margin | Approximately 38.2% of investment income | Approximately 45.6% in Q1 2020 |
| Cash at period end | $281.8 million | $82.2 million at December 31, 2020 |
| Debt, net of issuance costs | $1.66 billion | $1.61 billion at December 31, 2020 |
| Asset coverage ratio | 205% | 191% at December 31, 2020 |
Investment income consisted primarily of $58.1 million of interest income, $7.6 million of payment-in-kind interest, $0.3 million of dividend income and $0.5 million of other income. The company reported a $41.8 million net unrealized gain and a $1.0 million net realized gain. PIK interest represented approximately 11.5% of interest income, and does not represent current-period cash collections.
Operating cash flow was $(76.3) million, reflecting $438.9 million of investment purchases and $333.0 million of investment proceeds. Financing activities provided $275.8 million, including $250.0 million from common-share issuances and $42.6 million of gross debt borrowings less $318.0 million of debt repayments, debt issuance costs and distributions.
Material Changes Versus Prior Comparable Period
- Investment income increased 91.6% to $66.5 million, primarily because the investment portfolio grew substantially; interest income increased to $58.1 million from $32.5 million.
- Net investment income after taxes increased 60.7% to $25.4 million, but the margin declined because expenses grew faster than investment income.
- Total expenses increased by $21.9 million. Interest expense rose to $20.0 million from $7.6 million, management fees to $10.6 million from $7.4 million, and incentive fees to $7.6 million from $1.8 million.
- The company moved from a $40.2 million net loss from operations in Q1 2020 to a $68.3 million net increase, primarily due to the reversal of the prior-year unrealized investment loss and stronger investment income.
- Gross investment originations were $460.9 million versus $432.0 million, while investments funded increased to $439.2 million from $412.1 million. Investments sold or repaid increased to $311.5 million from $67.3 million.
- Common shares issued in the quarter raised $250.0 million, compared with $211.4 million in Q1 2020. Shares outstanding increased to 117.0 million at March 31, 2021 from 100.6 million at year-end.
- Total debt increased modestly, while available debt capacity increased to $1.18 billion from $1.09 billion. The Revolving Credit Facility commitment increased to $740 million from $590 million.
- The portfolio shifted toward equity and unsecured investments. Equity fair value increased to $327.6 million from $198.4 million, while second-lien debt fair value declined to $134.0 million from $208.3 million.
Guidance, Outlook, Risks and Unusual Items
- Management reported increased originations and an active investment pipeline as financing and M&A markets strengthened and portfolio-company performance improved as COVID-19 restrictions eased. It also expects repayments to increase based on market conditions and portfolio age.
- No formal earnings or investment guidance was provided. Management stated that investment income will vary with originations, repayments, portfolio composition and market conditions.
- COVID-19 remains a material uncertainty. The company continues to monitor portfolio companies and has expanded its portfolio management team to include workout expertise, but cannot predict the duration or financial effects of disruptions.
- Interest-rate and LIBOR transition risk is significant. Approximately 91.5% of debt investments were floating-rate, with a weighted-average LIBOR floor of 0.89%. The filing warns that replacement of LIBOR could reduce portfolio yields, increase borrowing costs or require renegotiation of credit agreements.
- Valuation risk is material because substantially all investments are illiquid Level 3 assets valued using significant unobservable inputs. A forced sale could produce proceeds materially different from reported fair values.
- The portfolio contained $220.1 million of unfunded portfolio-company commitments, up from $199.5 million. Management stated that cash, undrawn investor commitments and available debt capacity were sufficient to cover expected funding needs in the near term.
- Investor commitments totaled approximately $3.1 billion, including $1.5 billion undrawn. These undrawn commitments terminate following an initial public offering.
- The company declared a $0.24 per-share distribution for the first quarter and subsequently declared a distribution equal to 90% of estimated second-quarter taxable income, if any.
- The announced Owl Rock-Dyal transaction to form Blue Owl would change control of the Adviser. Shareholders approved an amended and restated investment advisory agreement on identical terms, subject to completion of the transaction.
- No investments were on non-accrual status at March 31, 2021, and management reported no pending or threatened material litigation.
Most Important Facts for Investors to Verify
- Confirm the completion and precise consequences of the Blue Owl transaction, including any change in control of the Adviser and effectiveness of the amended advisory and administration agreements.
- Assess sustainability of net investment income excluding the $41.8 million unrealized gain, $7.6 million of PIK interest and elevated prepayment-related fees.
- Review debt maturities, borrowing-base requirements, covenants and the company’s ability to fund $220.1 million of unfunded portfolio commitments.
- Evaluate exposure to LIBOR cessation, floating-rate assets and floating-rate borrowings, including potential spread or floor mismatches.
- Review Level 3 valuation assumptions and concentration in major investments, including the effect of market yields, revenue multiples and transaction prices.
- Monitor COVID-19 effects, portfolio-company credit ratings, non-accrual status and any deterioration in investments currently rated 3.
- Verify continued compliance with BDC asset-coverage, RIC distribution, diversification and qualifying-asset requirements.