Business Context and Reporting Period
Company: Owl Rock Capital Corporation (Owl Rock)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2018
Business Overview: Owl Rock is a Maryland corporation organized as a Business Development Company (BDC) and a Regulated Investment Company (RIC). It originates and makes loans to, and makes debt and equity investments in, U.S. middle-market companies. The company is managed by Owl Rock Capital Advisors LLC.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total Investments (Fair Value) | $3,029.2 million | $1,051.2 million (implied from prior period data) |
| Total Investment Income | $65.4 million | $23.3 million |
| Net Investment Income (After Tax) | $38.7 million | $12.8 million |
| Total Expenses | $26.7 million | $10.5 million |
| Net Increase in Net Assets from Operations | $44.3 million | $18.2 million |
| Earnings Per Share (Basic & Diluted) | $0.44 | $0.40 |
| Net Asset Value (NAV) Per Share | $15.14 | $15.05 |
| Total Debt (Outstanding Principal) | $1,353.0 million | $932.0 million |
| Asset Coverage Ratio | 223% | 258% |
| Cash and Restricted Cash | $25.9 million | $160.7 million |
Material Changes vs. Prior Period
- Portfolio Growth: The investment portfolio grew significantly, with total investments at fair value increasing from approximately $2.39 billion at year-end 2017 to $3.03 billion at March 31, 2018. Gross originations for the quarter totaled $1.11 billion.
- Revenue Expansion: Total investment income more than doubled to $65.4 million from $23.3 million year-over-year, driven primarily by a larger portfolio size and income from the Sebago Lake joint venture.
- Expense Increase: Total expenses rose to $26.7 million from $10.5 million. This was driven by a $9.1 million increase in interest expense (due to higher average daily borrowings of $1.15 billion vs. $0.34 billion) and a $7.0 million increase in management fees.
- Leverage Utilization: Outstanding debt principal increased to $1.35 billion from $0.93 billion. The company utilized its Subscription Credit Facility and SPV Asset Facility more heavily to fund new investments.
- Capital Raises: The company issued 11.3 million shares for $175.0 million during the quarter. As of March 31, 2018, total capital commitments from investors were $5.5 billion, with $3.9 billion undrawn.
Guidance, Outlook, and Risks
- Outlook: Management expects to continue originating loans to U.S. middle-market companies. The company maintains sufficient borrowing capacity and undrawn capital commitments ($3.9 billion) to fund future investments and operations.
- Distributions: A quarterly distribution of $0.33 per share was declared for the period ended March 31, 2018. The company has an "opt-out" dividend reinvestment plan.
- Key Risks:
- Interest Rate Risk: 98.8% of the debt portfolio is floating rate. While this aligns with floating rate liabilities, rising rates increase interest expense.
- Leverage: Recent legislation allows BDCs to increase leverage capacity (asset coverage ratio) from 200% to 150% with shareholder or board approval, which could increase risk.
- Market Conditions: Economic downturns could impair portfolio companies' ability to operate or repay debt.
- Valuation: Most investments are Level 3 (unobservable inputs), requiring significant judgment by the Board to determine fair value.
- Unusual Items: The company recorded a $0.1 million excise tax expense for the quarter. There were no material legal proceedings pending.
Investor Verification Checklist
- Capital Commitments: Verify the status of the $3.9 billion in undrawn capital commitments and the timeline for the company's planned Exchange Listing (IPO), which would terminate these commitments.
- Asset Coverage: Monitor the asset coverage ratio (currently 223%) to ensure compliance with the 1940 Act limits (200% or 150% with approval) as debt levels rise.
- Interest Rate Sensitivity: Assess the impact of rising LIBOR rates on net investment income, given the floating-rate nature of both assets and liabilities.
- Sebago Lake JV: Review the performance and valuation of the Sebago Lake LLC joint venture, which represents a significant portion of recent investment activity and income.
- Debt Maturities: Review the maturity schedule of the $1.35 billion in debt, particularly the Subscription Credit Facility and 2023 Notes, to understand refinancing risks.