Business context and reporting period
Blue Owl Technology Finance Corp. is a business development company and regulated investment company that primarily originates debt and equity investments in technology-related businesses. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2023; comparative periods are the corresponding 2022 periods. At quarter-end, the company held investments with a fair value of $6.25 billion across 122 portfolio companies.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Investment income | $173.0 million | $130.5 million | $505.7 million | $345.5 million |
| Expenses | $73.4 million | $68.6 million | $230.8 million | $145.3 million |
| Net investment income after taxes | $97.1 million | $59.8 million | $265.9 million | $192.6 million |
| Net realized and unrealized gains (losses) | ($40.3 million) | $93.6 million | $1.6 million | ($218.2 million) |
| Net increase (decrease) in net assets from operations | $56.8 million | $153.4 million | $267.5 million | ($25.5 million) |
| Earnings (loss) per share | $0.28 | $0.76 | $1.31 | ($0.13) |
- Income and margins: Net investment income after tax was 56.1% of investment income in Q3 2023, compared with 45.8% in Q3 2022; year-to-date it was 52.6%, versus 55.8%. These simple ratios are not company-reported operating margins.
- Portfolio and NAV: Fair value of investments was $6.25 billion, down from $6.41 billion at December 31, 2022. Net assets were $3.48 billion and NAV was $16.91 per share, compared with $16.70 at year-end 2022.
- Debt and leverage: Debt carrying value was $2.92 billion, versus $3.16 billion at year-end. Asset coverage was 217% (206% at year-end), and reported net debt-to-equity was 0.77x. The company reported $771.3 million of available revolving credit capacity.
- Liquidity and cash flow: Cash was $260.9 million; cash plus stated available revolving capacity was approximately $1.03 billion. For the first nine months, operating cash flow was $455.9 million, financing cash outflow was $398.3 million, and cash increased $57.6 million. Operating cash flow included $741.2 million of investment proceeds and repayments and $434.2 million of net investment purchases.
- Distributions: The company declared $1.08 per share for the first nine months of 2023, including a $0.37-per-share Q3 distribution. Distributions declared year-to-date totaled $223.4 million.
Material changes versus comparable periods
- Q3 investment income rose 33% year over year, while after-tax net investment income rose 62%. Management attributed higher investment income mainly to the portfolio’s higher weighted-average yield.
- Q3 operations income declined year over year because a $63.7 million unrealized loss offset stronger investment income; Q3 2022 had a $93.1 million unrealized gain. Q3 2023 included $23.5 million of realized gains.
- Year-to-date investment income increased substantially, but expenses rose faster in percentage terms, notably interest and incentive fees. Nine-month interest expense increased to $146.4 million from $90.7 million.
- The portfolio’s reported weighted-average yield at fair value rose to 10.7% from 9.8% at year-end 2022. About 96.2% of debt investments by fair value bore floating rates.
- Portfolio credit ratings shifted toward greater risk: ratings 3 and 4 together represented 9.7% of portfolio fair value, versus 5.6% at year-end. Non-accrual debt declined to 0.3% of debt-investment amortized cost from 0.7%.
Outlook, commentary, risks and unusual items
- Management said originations remained slow amid uncertainty, elevated rates and subdued M&A, though refinancing, add-on and buyout opportunities picked up during the quarter. It described portfolio credit quality as consistent and reported no broad deterioration at the time of filing, while warning that a prolonged recession could harm borrowers.
- No numerical earnings or investment guidance was provided. Management expects investment income and originations to vary with investment activity and repayments, and stated that cash and available debt capacity should support near-term activities and operations.
- The $337.5 million CLO 2020-1 refinancing closed August 23, 2023, replacing prior notes with new secured notes scheduled to mature in 2035. The revolving credit facility was amended September 26: commitments increased to $1.09 billion, availability was extended to September 2027, and maturity to September 2028.
- Valuation and liquidity merit attention: $5.93 billion, or most of investment fair value, was classified as Level 3; substantially all investments are private or otherwise lack readily available market prices. Fair values rely on valuation methods and significant unobservable inputs and may differ from realizable proceeds.
- PIK interest and dividend income was $111.6 million, or 22.1% of nine-month investment income; this is accrued rather than generally received in cash at the time recognized. Unfunded portfolio-company commitments were $370.1 million.
- Key risks include borrower credit deterioration, interest-rate and funding-cost changes, illiquid investment valuations, foreign currency exposure, inflation and the ability to maintain BDC and RIC status. The company reported no material pending or threatened litigation known to management and no defaults upon senior securities.
- After quarter-end, on November 7, the Board declared a distribution based on 90% of estimated Q4 investment company taxable income, if any, with a possible additional capital-gains amount under the stated formula; it did not specify a fixed per-share amount.
Important facts for investors to verify
- How portfolio credit ratings, non-accrual exposure and borrower liquidity have changed since September 30, especially the increase in ratings 3 and 4.
- Whether the Level 3 valuations and key assumptions remain supportable, and how concentrated unrealized losses are among equity holdings.
- How much reported income is cash-pay versus PIK, and whether borrowers are meeting interest and principal obligations.
- Current borrowing-base availability, asset coverage headroom, debt maturities and the effect of higher financing costs on net investment income.
- The source and tax character of distributions, including any return of capital or excise-tax implications; the filing notes some 2023 distributions may include amounts other than ordinary income.
- Whether the $370.1 million of unfunded commitments and other liquidity needs remain covered by available resources.