Business Context and Reporting Period
Registrant: Owl Rock Technology Finance Corp. (the filing predates the Blue Owl name in the request). This unaudited Form 10-Q covers the three and six months ended June 30, 2020, with comparisons to June 30, 2019. The company is a Maryland business development company and regulated investment company focused primarily on debt and equity investments in technology-related companies.
As of June 30, 2020, the company had 98.5 million common shares outstanding, 36 portfolio companies, and $2.2 billion of investments at fair value. Its portfolio was 76.5% first-lien senior secured debt, 6.0% second-lien senior secured debt, 13.9% unsecured debt and 3.6% equity, based on fair value.
Financial Performance and Position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total investment income | $40.5 million, versus $17.1 million | $75.3 million, versus $26.2 million |
| Net investment income after taxes | $21.8 million, versus $6.2 million | $37.6 million, versus $7.3 million |
| Net unrealized gain (loss) | $44.3 million, versus $0.5 million | $(11.7) million, versus $3.2 million |
| Net increase in net assets from operations | $66.1 million, versus $6.7 million | $25.9 million, versus $10.6 million |
| Earnings per share | $0.78, versus $0.19 | $0.36, versus $0.38 |
- Net investment income after taxes represented approximately 53.8% of investment income in the quarter and 50.0% year to date.
- Interest income excluding PIK increased to $36.5 million in the quarter and $69.0 million year to date. PIK interest was $3.7 million and $4.7 million, respectively.
- Total expenses increased to $18.6 million for the quarter and $37.4 million year to date. Six-month expenses included $13.8 million of interest expense, $15.2 million of management fees and $4.2 million of incentive fees.
- Net assets were $1.413 billion at June 30, 2020, compared with $777.2 million at December 31, 2019. Net asset value per share declined to $14.34 from $14.70.
- Cash was $228.2 million, compared with $142.4 million at year-end 2019. Six-month operating cash flow was negative $651.4 million, primarily reflecting $863.7 million of investment purchases, partly offset by $177.7 million of investment proceeds.
- Six-month financing cash flow was $737.2 million, including $636.2 million from common share issuances, net debt borrowings of approximately $120.0 million, and $18.8 million of distributions paid.
Debt, Liquidity and Portfolio Metrics
- Debt at carrying value was $945.0 million at June 30, 2020, compared with $823.8 million at December 31, 2019. Outstanding principal was $955.3 million, with $207.6 million of stated available capacity.
- Debt consisted of $545.3 million outstanding under the Subscription Credit Facility, $200.0 million under the Revolving Credit Facility and $210.0 million of 6.75% unsecured notes due June 30, 2025.
- Asset coverage was 247% at June 30, 2020, compared with 193% at year-end 2019. The company is permitted to operate under a 150% asset coverage requirement, subject to applicable conditions.
- Unfunded portfolio company commitments were $137.3 million, down from $167.9 million at December 31, 2019. Investor capital commitments totaled $2.8 billion, including $1.4 billion undrawn.
- The portfolio’s weighted average total yield was 7.8%, versus 7.9% at year-end 2019; the weighted average yield on debt and income-producing securities was 8.1%, versus 8.2%.
- Approximately 85.6% of debt investments at fair value carried floating rates. No investments were on non-accrual status at June 30, 2020.
- Approximately 97.1% of the debt portfolio’s principal amount was valued at fair value, compared with 98.5% at December 31, 2019. Approximately $2.095 billion, or 97.1% of total investments at fair value, was classified as Level 3.
Material Changes Versus Prior Comparable Period
- Investment income rose 137% in the quarter and 187% year to date, primarily because the investment portfolio expanded materially; management stated that portfolio par value increased from approximately $1.1 billion at June 30, 2019 to $2.2 billion at June 30, 2020.
- Net investment income after taxes increased 251% in the quarter and 419% year to date, although expenses grew substantially with portfolio and leverage growth.
- The second quarter benefited from a $44.3 million unrealized gain as credit spreads tightened from March 31, 2020. For the six-month period, the company recorded an $11.7 million unrealized loss as credit spreads widened from December 31, 2019.
- Management fees increased to $7.8 million for the quarter and $15.2 million year to date from $5.0 million and $9.2 million, respectively. Incentive fees based on net investment income were $2.4 million for the quarter and $4.2 million year to date.
- Average daily borrowings increased to approximately $797.2 million for the quarter and $797.4 million year to date, while average borrowing rates declined to 2.67% and 3.04%, respectively.
- The company issued 45.1 million shares for $636.2 million during the six months ended June 30, 2020, versus 22.0 million shares for $324.5 million in the prior-year period.
- Portfolio mix changed materially, including the addition of $298.9 million of unsecured debt investments and increased exposure to food and beverage and data and information services.
Guidance, Outlook, Commentary and Risks
- Management expects COVID-19 to continue affecting portfolio company performance during the third quarter of 2020 and is prioritizing preservation of capital for existing portfolio companies. It expects some portfolio companies may experience financial distress or default.
- The company has amended loan documents to provide covenant modifications or additional liquidity, in some cases allowing interest to be paid in kind. Such actions may increase economics but could reduce near-term cash interest and increase credit risk.
- The board declared distributions of $0.20 per share for June 30, 2020 and $0.21 per share for March 31, 2020. On August 4, 2020, it declared a distribution equal to 90% of estimated third-quarter taxable income and net capital gains, if any.
- On August 11, 2020, after the reporting date, a subsidiary entered into a $300 million SPV asset facility with a stated maturity in 2030. The facility is secured by assets held by the subsidiary and is subject to overcollateralization, advance-rate, interest-coverage, concentration and collateral-quality tests.
- Key risks include COVID-19-related defaults, lower investment valuations, illiquidity, reduced cash interest, refinancing and funding risk, leverage, interest-rate volatility, LIBOR transition, foreign currency exposure, covenant-lite investments, and reliance on fair-value estimates for predominantly Level 3 assets.
- Private investments are valued using significant unobservable inputs; actual realizable values may differ materially from reported fair values, particularly in a forced sale or prolonged market disruption.
- The company relies on continued compliance with BDC and RIC requirements, including asset diversification, qualifying-asset and distribution requirements. Failure to maintain RIC status could result in corporate-level taxation.
- Management reported no material pending or threatened litigation and no defaults upon senior securities. Disclosure controls and procedures were assessed as effective.
Important Facts for Investors to Verify
- Assess the sustainability of net investment income after the quarter’s unusually large unrealized valuation gain and the effect of higher PIK income on cash generation.
- Review COVID-19 covenant amendments, liquidity support, watch-list ratings and any subsequent non-accruals or restructurings among the 36 portfolio companies.
- Reconcile debt capacity, borrowing-base limitations, maturity dates and covenants across the Subscription Credit Facility, Revolving Credit Facility, 2025 Notes and post-quarter SPV asset facility.
- Evaluate the sensitivity of income to LIBOR transition and base-rate changes, given the large floating-rate portfolio and floating-rate borrowings.
- Examine Level 3 valuation assumptions, including market yields, transaction prices and revenue multiples, and compare reported values with subsequent transactions or repayments.
- Confirm the source and tax character of distributions, including potential return of capital, and the company’s continued qualification as a RIC and BDC.
- Verify the filing’s legal name and any subsequent rebranding to Blue Owl Technology Finance Corp., since the submitted filing identifies the registrant as Owl Rock Technology Finance Corp.