Business Context and Reporting Period
Owl Rock Technology Finance Corp. (now identified in the request metadata as Blue Owl Technology Finance Corp.) filed its Form 10-K for the year ended December 31, 2019. The company was formed in July 2018 and commenced operations in August 2018, so the prior comparable period covers only the inception-to-December 31, 2018 period and is not fully comparable.
The company is an externally managed, non-traded business development company and regulated investment company. It originates debt and equity investments primarily in U.S. technology- and life sciences-related companies, with an objective of generating current income and, to a lesser extent, capital appreciation. Owl Rock Technology Advisors LLC is the investment adviser.
Financial and Portfolio Metrics
| Metric | 2019 / December 31, 2019 | 2018 / December 31, 2018 |
|---|---|---|
| Total investment income | $83.7 million | $2.6 million |
| Net investment income after taxes | $31.1 million | $(2.1) million |
| Net realized gain | $1.6 million | — |
| Net unrealized gain (loss) | $(2.0) million | $(1.1) million |
| Net increase (decrease) in net assets from operations | $30.7 million | $(3.2) million |
| Earnings per share | $0.84 | $(0.34) |
| Total assets | $1.625 billion | $588.2 million |
| Investments at fair value | $1.476 billion | $262.8 million |
| Total net assets | $777.2 million | $286.7 million |
| Net asset value per share | $14.70 | $14.53 |
| Cash | $142.4 million | $323.0 million |
| Distributions declared per share | $0.65 | — |
Interest income was $81.3 million and other income was $2.4 million. Total expenses were $52.5 million, including $21.7 million of interest expense, $22.1 million of management fees and $2.6 million of incentive fees. Net investment income was 5.5% of average net assets, while total expenses were 9.3% of average net assets.
Cash used in operating activities was $1.176 billion, primarily reflecting $1.397 billion of investment purchases, partly offset by $186.4 million of investment proceeds. Financing activities provided $994.9 million, including $484.0 million of net share issuance proceeds and net borrowing activity, after distributions paid.
Portfolio, Debt and Liquidity
- The portfolio comprised 29 companies with aggregate fair value of $1.476 billion.
- Portfolio composition by fair value was 93.6% first-lien senior secured debt, 2.5% second-lien senior secured debt and 3.9% equity.
- All debt investments were floating-rate investments, subject in some cases to interest-rate floors. Weighted average total portfolio yield was 7.9%; weighted average yield on debt and income-producing securities was 8.2%.
- The largest industry exposures were business services at 26.9%, healthcare technology at 17.0%, education at 16.4% and internet and digital media at 8.7%.
- Outstanding debt was $830.7 million, compared with $300.0 million at December 31, 2018. Net carrying value was $823.8 million.
- Debt consisted of $645.7 million outstanding under the Subscription Credit Facility and $185.0 million under the Revolving Credit Facility. Available capacity was $223.4 million, subject to borrowing-base limitations.
- Asset coverage was 193%, down from 195% in 2018, versus the company’s permitted 150% minimum asset-coverage level.
- Cash, undrawn investor commitments of approximately $1.7 billion and available debt capacity were expected by management to support near-term investments and operations.
- Unfunded portfolio-company investment commitments were $167.9 million, compared with $65.1 million in 2018.
- Total investor capital commitments were $2.5 billion, of which $1.7 billion remained undrawn.
Material Changes Versus the Prior Comparable Period
- The investment portfolio expanded substantially, with fair value increasing from $262.8 million to $1.476 billion and the number of portfolio companies increasing from six to 29.
- New investment commitments increased to $1.430 billion, including $1.215 billion of funded investments, compared with $332.0 million of new commitments and $261.7 million of funded investments in the inception period of 2018.
- The portfolio shifted from primarily education, professional services, transportation and aerospace exposures in 2018 to a broader portfolio led by business services, healthcare technology, education and internet and digital media.
- First-lien debt increased from $214.3 million to $1.382 billion at fair value. Unsecured debt declined from $28.9 million to zero, while equity investments increased from zero to $57.5 million.
- Average daily borrowings rose to $479.1 million from $36.2 million, while the average borrowing rate declined to 3.76% from 5.91%.
- Net asset value per share increased modestly to $14.70 from $14.53 despite $0.65 per-share distributions.
- All investments were rated 2 under the adviser’s internal risk-rating system, and no debt investments were on non-accrual status at year-end.
Outlook, Commentary, Risks and Unusual Items
Management described technology lending as an attractive market because of perceived demand for customized capital, limited bank lending to technology companies and continued technology investment and private-equity activity. The company did not provide quantitative earnings or investment guidance. It expects to continue investing primarily in floating-rate, senior secured loans, with a smaller allocation to equity and equity-linked securities.
- The company has no public trading market for its shares. Shares are privately offered to accredited investors and are generally subject to transfer restrictions. If an exchange listing is not completed by the end of the commitment period, the company may seek to wind down and liquidate.
- Leverage magnifies both gains and losses. Credit facilities contain borrowing-base, liquidity, asset-coverage and other covenants; defaults could force accelerated repayment or asset sales.
- The Subscription Credit Facility is secured by investor capital commitments. A default could require investors to fund remaining commitments without regard to the value of their investment.
- Portfolio investments are predominantly illiquid and valued using significant Level 3 inputs. Actual realizable values may differ materially from reported fair values.
- Interest-rate changes and the expected discontinuation of LIBOR after 2021 could affect investment income, borrowing costs, portfolio values and contractual terms.
- The adviser and affiliates manage other BDCs and funds, creating potential conflicts in allocating investment opportunities, expenses and co-investments. The company relies on SEC exemptive relief and an allocation policy.
- Investment income includes accrued and potentially non-cash amounts such as original issue discount and payment-in-kind interest. The adviser may receive incentive fees on such income even if cash is not subsequently collected.
- The company is dependent on its adviser and has no employees. Loss of key personnel, limited adviser operating history and competition for technology investments are material risks.
- The company accrued $107,000 of federal excise tax in 2019 and must distribute sufficient taxable income to preserve RIC treatment and minimize excise taxes.
- No material pending or threatened litigation was reported. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019. The independent auditor was not required to provide an internal-control attestation because the company was an emerging growth company.
Important Facts for Investors to Verify
- Confirm the company’s current legal name and whether subsequent transactions or reorganizations changed its status from Owl Rock Technology Finance Corp. to Blue Owl Technology Finance Corp.
- Reconcile the reported $1.476 billion portfolio fair value, $830.7 million of debt and 193% asset coverage with the latest financial statements.
- Review credit-facility maturities, covenants, borrowing-base availability and the effect of any LIBOR replacement provisions.
- Assess concentration in major portfolio companies and industries, particularly business services, healthcare technology, education and internet and digital media.
- Evaluate the valuation methodology and sensitivity of Level 3 investments, including the reported $2.0 million net unrealized loss.
- Confirm the extent and collectability of the $167.9 million of unfunded portfolio commitments and the $1.7 billion of undrawn investor commitments.
- Verify whether an exchange listing occurred, whether shares remain illiquid, and whether the commitment period or liquidation provisions have changed.
- Review adviser fees, incentive-fee mechanics, related-party transactions and co-investment allocations with affiliated funds.
- Determine whether subsequent economic conditions, including the COVID-19 pandemic, affected portfolio-company credit quality after the December 31, 2019 reporting date.