Blue Owl Capital Corporation (NYSE: OBDC) — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. Blue Owl is an externally managed business development company and regulated investment company focused on lending to U.S. middle-market businesses. The filing was signed February 21, 2024. Unless noted, amounts are U.S. dollars.
Business context and portfolio
The Company seeks current income and, to a lesser extent, capital appreciation, primarily through loans to middle-market companies. At year-end, it held investments in 193 companies with fair value of $12.7 billion, versus 184 companies and $13.0 billion a year earlier. The portfolio was 68.1% first-lien debt, 14.0% second-lien debt, 2.3% unsecured debt, 3.4% preferred equity, 9.5% common equity and 2.7% joint ventures, based on fair value. Floating-rate investments represented 97.4% of debt investments.
Financial results and key metrics
| Metric | 2023 | 2022 |
|---|---|---|
| Investment income | $1,582.1 million | $1,202.0 million |
| Operating expenses | $815.7 million | $639.5 million |
| Net investment income after tax | $753.6 million | $556.7 million |
| Net realized gain (loss) | $(53.2) million | $4.1 million |
| Net change in unrealized gain (loss) | $92.9 million | $(94.5) million |
| Increase in net assets from operations | $793.3 million | $466.4 million |
| Cash and restricted cash, including foreign cash | $659.7 million | $445.1 million |
| Investments at fair value | $12,713.3 million | $13,010.3 million |
| Total debt, net carrying value | $7,077.1 million | $7,281.7 million |
| Total net assets / NAV per share | $6,021.4 million / $15.45 | $5,882.4 million / $14.99 |
Net investment income after tax was approximately 47.6% of investment income in 2023, calculated from the reported figures. Interest expense rose to $436.3 million from $307.5 million; average borrowing cost increased to 5.5% from 3.7%, while average daily borrowings were $7.4 billion versus $7.3 billion. Net leverage was 1.09x debt-to-equity, within the Company’s 0.90x–1.25x target range.
Operating activities provided $1.136 billion of cash, primarily reflecting investment repayments and sell-downs, partly offset by new investment funding. Financing activities used $921.0 million, including $613.4 million of cash distributions and $260.9 million of net debt repayments. Year-end debt principal was $7.202 billion, with $1.417 billion available under credit facilities, subject to borrowing-base limits and other terms. Asset coverage was 183%, compared with 179% in 2022; the statutory minimum is 150%.
Changes versus the prior year
- Investment income increased 31.7%, principally as portfolio yield rose from 11.0% to 11.9%; this was partly offset by lower debt investments at par, down from $11.7 billion to $11.0 billion.
- Net investment income after tax increased 35.4%. Higher interest expense and incentive fees contributed to the 27.6% rise in operating expenses.
- Operations benefited from a $92.9 million unrealized gain, compared with a $94.5 million unrealized loss in 2022, but included a $53.2 million realized loss versus a $4.1 million realized gain.
- Portfolio fair value declined about 2.3%, while NAV per share increased from $14.99 to $15.45. The filing attributes the NAV increase to earnings in excess of dividends and net unrealized and realized appreciation.
- Portfolio ratings were broadly similar: 89.1% of fair value was rated 1 or 2 in 2023, versus 89.1% in 2022. Four portfolio companies were on non-accrual; non-accrual debt was 1.3% of debt amortized cost, down from 1.9%.
Outlook, risks and unusual items
The filing provides no specific earnings or investment guidance. Management described credit quality as consistent, reported that many portfolio companies continued to see solid demand and modest revenue and EBITDA growth, and said it was increasing originations to offset repayments and keep leverage within target. Management also cautioned that high interest rates, inflation, geopolitical and economic instability could challenge borrowers; it reported no broad deterioration at the filing date.
- Credit and valuation: Private, illiquid holdings are largely valued using Level 3 inputs; approximately $12.3 billion of investments were Level 3. KPMG identified valuation of these investments as a critical audit matter. Fair values may differ materially from proceeds ultimately realized.
- Non-cash income: PIK interest was $171.7 million, or 13.2% of investment income; PIK and other accrued income can increase reported income without current cash receipts. Incentive fees may be payable on accrued PIK income that is later uncollected.
- Leverage and rates: Higher borrowing costs reduce income, while higher rates can strain borrowers and increase defaults. The filing’s sensitivity analysis estimates that a 100-basis-point base-rate move changes annual net income by approximately $68.3 million before income-based fees, assuming the stated balance-sheet structure.
- Commitments and structure: Unfunded portfolio commitments were $954.8 million, versus $926.1 million. The Company said it believed it had adequate resources to fund them. Secured facilities and CLOs pledge collateral; CLO equity is subordinated and distributions may be diverted if coverage tests fail.
- Income and distributions: 2023 distributions declared totaled $1.59 per share, or $620.3 million. The Company had $118.3 million of undistributed ordinary income and recorded $12.8 million of income-tax expense, including excise tax. Distributions are board-discretionary and may include return of capital; RIC status depends on meeting distribution and other requirements.
- Concentration, conflicts and other risks: Internet software and services were 11.8% of portfolio fair value and insurance 9.9%. The Adviser manages other funds with overlapping strategies, creating allocation and other conflicts. The Company reported no material cybersecurity incident in 2023 and no material pending or threatened litigation known to management.
Subsequent events: In January 2024, the Company completed a CLO I refinancing, increased the ORCC Financing II revolving commitment to $300 million, and issued $600 million of 5.95% notes due March 2029. The Board declared a first-quarter dividend of $0.37 per share and a supplemental dividend of $0.08 per share.
Important facts for investors to verify
- Reconcile the 2023 investment-income increase with the higher cost of debt and the 13.2% share of income from PIK interest.
- Review Level 3 valuation assumptions, especially for underperforming and restructured investments, and compare valuations with subsequent repayments or transactions.
- Assess non-accrual exposures and the recoverability of investments with significant fair-value markdowns, including H-Food Holdings and Loparex.
- Confirm liquidity after scheduled debt maturities, unfunded commitments, collateral constraints and the January 2024 note issuance; distinguish available facility capacity from unrestricted cash.
- Evaluate distribution coverage from taxable and cash income, the potential for return-of-capital distributions, and the Company’s continued ability to qualify as a RIC and meet BDC asset-coverage requirements.
- Consider how affiliate allocation practices, fee incentives, leverage and portfolio concentration may affect shareholder outcomes.