Business context and reporting period
Blue Owl Capital Corporation (formerly Owl Rock Capital Corporation; NYSE ticker changed to OBDC on July 6, 2023) filed this unaudited Form 10-Q for the quarter ended June 30, 2023. The business is a BDC focused primarily on originating loans to and investing in U.S. middle-market companies, seeking current income and, to a lesser extent, capital appreciation.
Financial and portfolio results
Unless otherwise noted, amounts are in millions of dollars. Comparisons are with the corresponding 2022 period; balance-sheet comparisons are with December 31, 2022.
- Investment income: Q2 was $394.2, up from $273.3; first-half income was $771.8, up from $537.4. Management attributed the increase chiefly to higher portfolio yields, which reached 11.7% from 8.7% a year earlier, partly offset by a smaller debt portfolio.
- Expenses and earnings: Q2 operating expenses were $205.2 (2022: $146.6), including interest expense of $110.0 and incentive fees of $39.6. Net investment income after taxes was $186.7 (2022: $125.1); net increase in net assets from operations was $195.6, versus a $34.9 decrease. First-half after-tax net investment income was $364.5 (2022: $247.5), and the increase from operations was $397.4 (2022: $9.0). Q2 after-tax net investment income was about 47% of investment income.
- Per-share and NAV: Q2 earnings per share were $0.50 (2022: loss of $0.09); first-half earnings per share were $1.02 (2022: $0.02). NAV per share rose to $15.26 from $14.99 at year-end. Net assets were $5,949.
- Portfolio: Fair value was $12,893 across 187 portfolio companies. Investments were 69.1% first-lien secured debt, 14.1% second-lien secured debt, 2.1% unsecured debt, 3.1% preferred equity, 8.8% common equity and 2.8% joint ventures. Floating-rate investments represented 98.1% of debt investments by fair value. Weighted-average portfolio yield was 11.7%; debt-to-equity net leverage was 1.14x.
- Credit quality and valuation: Debt investments on non-accrual had $122.4 amortized cost, or 1.1% of debt-investment amortized cost, down from 1.9% at year-end. Ratings 4 and 5 together represented 1.0% of portfolio fair value. Most investments are Level 3, using significant unobservable valuation inputs; restricted securities were 31.9% of net assets.
- Cash flow and liquidity: First-half operating cash flow was $542.8; financing cash use was $620.0, and cash and restricted cash, including foreign cash, fell $77.2 to $367.9. The company reported $1.5 billion available under credit facilities. Unfunded portfolio commitments were $808.4, and management said it believed available resources were adequate to meet them and near-term needs.
- Debt: Debt carrying value was $7,027, down from $7,282 at year-end; debt fair value was $6,689. Asset coverage was 183%, up from 179%, versus a 150% statutory minimum. Weighted-average total cost of debt was 5.3%; average borrowing rates were 5.4% in Q2 and 5.3% in the first half, compared with 3.2% and 3.1% in 2022. Facility availability was affected by borrowing-base limits and included $45.8 of letters of credit.
- Distributions and repurchases: First-half distributions declared totaled $296.8; 2023 quarterly base distributions were $0.33 per share, with supplemental distributions of $0.04 and $0.06 in the first and second quarters. The company repurchased 2.74 million shares for $34.1 during the first half under its $150 million repurchase program.
Material changes versus the prior comparable period
- Higher floating-rate portfolio yields drove substantially higher investment income, but rising funding costs also lifted interest expense: $110.0 in Q2 versus $67.3, and $214.0 for the first half versus $128.7.
- Q2 results shifted from an operating loss in 2022 to a profit, with the comparison also reflecting an $8.9 unrealized gain in Q2 2023 versus a $160.1 unrealized loss in Q2 2022. First-half unrealized gains were $85.5 versus losses of $242.0.
- First-half realized investment losses were $52.4, compared with gains of $4.7 in 2022. Management said first-half unrealized gains included reversals of prior unrealized losses associated with restructurings of certain debt investments.
- The debt portfolio’s non-accrual share declined, while portfolio fair value was modestly lower than year-end. Debt-to-equity leverage remained within the stated target range of 0.90x–1.25x.
Outlook, commentary, risks and unusual items
- Management described originations and repayments as moderate amid higher rates, reduced refinancing activity, lower M&A activity and market uncertainty. It said portfolio credit quality had been consistent, with no broad deterioration observed, while cautioning that recession could weaken portfolio-company performance.
- Management expects higher rates to benefit net investment income as floating-rate loans reset above floors; the average base rate on floating-rate debt investments was about 5.2% at June 30. This is an expectation, not formal earnings guidance.
- Key risks include borrower credit deterioration and defaults, leverage and higher funding costs, illiquidity and uncertainty in Level 3 valuations, inflation, recession, rate and currency movements, and access to financing. PIK interest and dividends were 13.8% of first-half investment income, increasing reliance on income that is accrued rather than received in cash.
- After quarter-end, the company announced a third-quarter base distribution of $0.33 per share and a second-quarter supplemental distribution of $0.07. It also completed its name and ticker change and made additional LIBOR-to-SOFR benchmark conforming changes to certain CLO indentures.
- The filing reports no material pending or threatened litigation requiring disclosure, no defaults on senior securities, and effective disclosure controls; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether higher floating-rate investment income continues to exceed rising borrowing costs, and how changes in rates affect net investment income.
- Trends in non-accruals, credit ratings, PIK income and portfolio-company liquidity, particularly among challenged or restructured investments.
- Valuation assumptions for Level 3 investments, including the effect of market yields, recovery assumptions and portfolio-company performance on NAV.
- Debt maturities, borrowing-base availability, asset-coverage headroom and capacity to fund $808.4 million of unfunded commitments.
- Whether distributions remain supported by taxable income and cash receipts; confirm the final tax characterization, including any return-of-capital component.
- Exposure to affiliated and controlled investments, co-investment arrangements, and the concentration of restricted or illiquid assets.