Blue Owl Technology Finance Corp. (formerly Owl Rock Technology Finance Corp.) — Form 10-Q Summary
Reporting period: Three months ended March 31, 2019; filed May 8, 2019. The Company was formed in July 2018 and commenced operations in August 2018, so the filing does not provide a comparable prior-year operating period.
Business Context
The Company is a Maryland business development company and intends to qualify as a regulated investment company for tax purposes. It originates primarily senior secured, unsecured, subordinated and equity-related investments in U.S. technology and life-sciences companies, with a stated policy of investing at least 80% of total assets in technology-related businesses.
At March 31, 2019, the portfolio comprised 13 companies with fair value of $623.7 million. Investments were 91.0% first-lien senior secured debt, 3.1% second-lien senior secured debt, 5.1% unsecured debt and 0.8% equity. All investments were rated investment rating 2 by the Adviser, and no investments were on non-accrual status.
Financial Position and Results
| Metric | March 31, 2019 / Three Months Ended | Prior Comparable Information |
|---|---|---|
| Total assets | $1,057.7 million | $588.2 million at December 31, 2018 |
| Investments at fair value | $623.7 million | $262.8 million at December 31, 2018 |
| Cash | $426.7 million | $323.0 million at December 31, 2018 |
| Total debt, net | $585.1 million | $297.6 million at December 31, 2018 |
| Net assets | $464.2 million | $286.7 million at December 31, 2018 |
| NAV per share | $14.70 | $14.53 at December 31, 2018 |
| Total investment income | $9.1 million | No comparable operating period disclosed |
| Total expenses | $8.1 million | No comparable operating period disclosed |
| Net investment income after taxes | $1.0 million | No comparable operating period disclosed |
| Net realized gain | $0.1 million | No comparable operating period disclosed |
| Net unrealized gain | $2.8 million | No comparable operating period disclosed |
| Net increase in net assets from operations | $3.9 million; $0.19 per share | No comparable operating period disclosed |
| Distribution declared | $0.05 per share | Payable May 15, 2019 |
Interest income was $9.0 million and other income was $0.1 million. Expenses included $2.4 million of interest expense, $4.2 million of management fees, $0.2 million of incentive fees, $0.7 million of professional fees, $0.1 million of directors’ fees and $0.5 million of other general and administrative expenses. The ratio of total expenses to average net assets was 8.6% annualized, while net investment income to average net assets was 1.1% annualized.
The portfolio’s weighted average total yield was 8.4% at fair value and 8.5% at amortized cost. Approximately 94.9% of debt investments at fair value had floating interest rates. The portfolio turnover rate was 8.2%.
Cash Flow, Liquidity and Debt
- Operating activities used $355.6 million, primarily reflecting $394.9 million of investment purchases, partially offset by $37.0 million of investment proceeds.
- Financing activities provided $459.3 million, including $171.9 million net proceeds from share issuance and $287.4 million of net borrowings after debt issuance costs.
- Cash increased by $103.7 million to $426.7 million.
- Outstanding principal debt was $591.4 million against total commitments of $740.0 million, with $148.6 million of borrowing capacity available.
- The Subscription Credit Facility had $484.4 million outstanding and $15.6 million available. The Senior Secured Revolving Credit Facility had $107.0 million outstanding and $133.0 million available at March 31, 2019.
- Asset coverage was 178%, down from 195% at December 31, 2018, but above the statutory 150% minimum described in the filing.
- Unfunded portfolio company commitments totaled $58.3 million, down from $65.1 million at year-end. Investor capital commitments totaled approximately $1.9 billion, including $1.4 billion undrawn.
Material Changes Versus December 31, 2018
- Investments increased by $360.9 million, from $262.8 million to $623.7 million at fair value, and the number of portfolio companies increased from six to 13.
- Debt increased by $287.6 million, primarily due to the addition and utilization of the Revolving Credit Facility and increases to the Subscription Credit Facility.
- Net assets increased by $177.5 million, including $175.0 million from the issuance of 11.8 million common shares.
- NAV per share increased from $14.53 to $14.70.
- Portfolio concentration shifted materially toward business services, which represented 29.6% of fair value, and away from education and professional services.
- Weighted average total portfolio yield increased from 8.0% to 8.4%, and the weighted average spread over LIBOR increased from 5.1% to 5.6%.
- The Company entered into the $240.0 million Revolving Credit Facility on March 15, 2019. The filing notes that its maximum principal amount was increased to $280.0 million on May 2, 2019, after the reporting date.
Guidance, Outlook, Risks and Unusual Items
Management did not provide quantitative earnings or investment guidance. The Company expects to continue investing in technology-related companies and stated that cash, undrawn investor commitments and available debt capacity should be sufficient for near-term investing and operations.
- Primary risks include economic downturns, portfolio company credit deterioration, illiquidity and valuation uncertainty, interest-rate volatility, currency fluctuations, competition for investments, leverage, financing availability, loss of key personnel and regulatory or tax changes.
- Approximately $552.7 million, or most of the investment portfolio, was classified as Level 3 and valued using significant unobservable inputs. Actual realizable values could differ materially from reported fair values.
- Higher interest rates may affect both investment income and borrowing costs. The filing’s sensitivity analysis indicates that the net income effect of rate changes could be limited or directionally unusual because both assets and liabilities are predominantly floating rate.
- The Company relies on private investor capital commitments, which generally cease to remain effective after completion of an initial public offering.
- The Company intends to maintain RIC and BDC status and must satisfy asset, income and distribution requirements. It accrued $5,000 of federal excise tax for the quarter.
- No material litigation, defaults upon senior securities or material changes to previously disclosed risk factors were reported.
- The Board declared a distribution equal to 90% of estimated second-quarter taxable income and net capital gains, if any, for shareholders of record on June 30, 2019, payable on or before August 15, 2019.
Most Important Facts to Verify
- Verify the company-name transition from Owl Rock Technology Finance Corp. in the filing to Blue Owl Technology Finance Corp. in current records.
- Reconcile the substantial portfolio expansion with underwriting quality, concentration limits and future credit performance.
- Review the $591.4 million of outstanding debt, asset coverage of 178%, borrowing-base availability and facility covenants.
- Assess valuation sensitivity for the predominantly Level 3 portfolio and the sustainability of the $2.8 million unrealized gain.
- Confirm the status and drawability of the approximately $1.4 billion of undrawn investor commitments and the effect of any future public offering.
- Evaluate management and incentive fees, related-party co-investment arrangements and allocation of opportunities among affiliated funds.
- Confirm subsequent-period developments, including the May 2, 2019 increase in Revolving Credit Facility capacity and the declared second-quarter distribution.