Blue Owl Technology Finance Corp. (then Owl Rock Technology Finance Corp.) — 10-Q Summary
Business context and reporting period
The filing covers the period ended September 30, 2018, but the company was formed on July 12, 2018, commenced operations on August 10, 2018, and made its first portfolio investment in September 2018. It is a Maryland business development company (BDC) focused primarily on originating debt and equity investments in U.S. technology-related companies. The company also intends to qualify as a regulated investment company (RIC) for tax purposes.
The company conducted private offerings to accredited investors through capital commitments and drawdowns. As of September 30, 2018, it had 10,834,900 common shares outstanding and subsequently reported $0.6 billion of total capital commitments, of which $0.4 billion was undrawn.
Financial condition and key metrics
| Metric | September 30, 2018 or period since inception |
|---|---|
| Total assets | $160.3 million |
| Cash | $108.5 million |
| Investments at fair value | $31.5 million |
| Total liabilities | $1.2 million |
| Net assets | $159.1 million |
| Net asset value per share | $14.68 |
| Investment income | $0.2 million, entirely interest income |
| Total expenses | $1.1 million |
| Net investment loss | $0.9 million |
| Net unrealized investment loss | $2 thousand |
| Net decrease in net assets from operations | $0.9 million |
| Basic and diluted loss per share | $0.35 |
| Net cash used in operating activities | $31.4 million |
| Net cash provided by financing activities | $139.9 million |
The investment portfolio consisted of one healthcare technology company in the U.S. Northeast. It comprised $12.0 million of first-lien senior secured debt and $20.0 million of second-lien senior secured debt, with a combined fair value of $31.5 million. All investments were Level 3 and performing, with no investments on non-accrual status. The portfolio’s weighted-average total yield was 9.3%, and all debt investments had floating rates. The filing reports no debt outstanding at September 30, 2018.
Material changes and period comparability
- This was the company’s initial reporting period; no prior comparable operating period exists, so period-over-period comparisons are not meaningful.
- The company raised $160.0 million through two private drawdowns: $40.0 million in August and $120.0 million in September.
- It funded its first investment, a $32.0 million commitment, in September.
- Subsequent to September 30, 2018, additional subscription agreements increased total capital commitments to $0.8 billion, with $0.6 billion undrawn.
- The company formed wholly owned subsidiary OR Tech Lending LLC on September 24, 2018, intended to originate loans to California-headquartered borrowers.
Guidance, outlook, commentary, risks and unusual items
Management expects to focus on direct lending to established and high-growth technology and life sciences companies, generally maintaining at least 80% of total assets in technology-related businesses. It expects the portfolio to be primarily debt and income-producing securities, including floating-rate loans, with a smaller allocation to equity and equity-linked investments.
Management stated that cash of $108.5 million and undrawn capital commitments of approximately $0.4 billion were expected to support near-term investing and operating needs. The company may use debt financing in the future, subject to regulatory, contractual and market constraints. Its approved framework permits operation at an asset coverage ratio as low as 150%, if applicable requirements are met.
- Initial organization expenses of $0.3 million and professional fees of $0.2 million contributed to the start-up period loss.
- The management fee was $0.2 million; no incentive fee was recorded.
- The company’s investment valuations are primarily based on Level 3, unobservable inputs and may differ materially from realizable values in a forced sale.
- Portfolio concentration is significant: 100% of fair value was invested in one healthcare technology company and one geographic region.
- Floating-rate exposure creates sensitivity to LIBOR and future interest-rate changes. The filing estimates that a 100-basis-point increase in base rates would increase annualized interest income and net income by approximately $0.3 million, before any borrowing effects.
- Key risks include economic downturns, portfolio-company credit losses, illiquidity, valuation uncertainty, competition, reliance on the Adviser, interest-rate volatility, potential leverage, regulatory and tax qualification requirements, and conflicts or allocation issues arising from co-investments with affiliates.
- The filing reports no material litigation, no defaults upon senior securities, no material changes to previously disclosed risk factors, and effective disclosure controls and procedures.
Important facts for investors to verify
- Confirm the company’s current legal and operating name, as the filing identifies it as Owl Rock Technology Finance Corp., while the request identifies Blue Owl Technology Finance Corp.
- Review subsequent filings for changes in capital commitments, drawdowns, portfolio diversification, leverage and any exchange listing.
- Assess the credit quality and valuation of the concentrated single-company, Level 3 investment portfolio.
- Verify the timing and amount of any distributions and whether RIC qualification was achieved and maintained.
- Review management and incentive fee terms, affiliate co-investment arrangements, and potential conflicts of interest.
- Monitor the effect of floating-rate exposure, LIBOR transition, future borrowing costs and any adoption of leverage.