Business Context and Reporting Period
The filing is an unaudited Form 10-Q for Owl Rock Technology Finance Corp. (the filing name; current metadata identifies Blue Owl Technology Finance Corp.) for the three and nine months ended September 30, 2019, filed November 5, 2019. The company is a business development company and regulated investment company focused primarily on debt and equity investments in technology-related companies.
The company was formed in July 2018 and commenced operations in August 2018; therefore, the September 2018 comparison period covers only the period from inception on July 12, 2018 through September 30, 2018 and is not fully comparable.
Key Financial Metrics
| Metric | Three months ended September 30, 2019 | Nine months ended September 30, 2019 |
|---|---|---|
| Total investment income | $27.2 million | $53.4 million |
| Net investment income after taxes | $11.4 million | $18.7 million |
| Net realized gain | $1.5 million | $1.6 million |
| Net unrealized gain (loss) | $(5.3) million | $(2.1) million |
| Net increase in net assets from operations | $7.6 million | $18.2 million |
| Earnings per share | $0.18 | $0.56 |
| Total expenses | $15.7 million | $34.7 million |
| Cash flow from operating activities | Not separately presented | $(1,041.4) million |
- Net asset value was $672.7 million, or $14.66 per share, at September 30, 2019, compared with $286.7 million, or $14.53 per share, at December 31, 2018.
- Investments at fair value were $1.339 billion, compared with $262.8 million at December 31, 2018. The portfolio comprised 93.0% first-lien senior secured debt, 2.7% second-lien senior secured debt and 4.3% equity investments.
- The portfolio included 29 companies, with a weighted-average total portfolio yield of approximately 8.0% and a weighted-average yield on debt and income-producing securities of approximately 8.4% at September 30, 2019.
- All debt investments were floating-rate, subject in certain cases to interest-rate floors. No investments were on non-accrual status, and all investments were rated 2 under management’s internal credit-rating system.
- Cash was $126.7 million at quarter-end. Cash used in investing activities was significant because the company funded $1.195 billion of investment purchases, partially offset by $119.8 million of investment proceeds.
- Debt had a net carrying value of $768.5 million, consisting of $721.6 million under the Subscription Credit Facility and $46.8 million under the Revolving Credit Facility. Outstanding principal was $775.6 million, with $329.4 million of stated availability.
- Asset coverage was 185% at September 30, 2019, compared with 195% at December 31, 2018.
- Management fees were $6.1 million for the quarter and $15.3 million for the nine months. Interest expense was $7.3 million and $14.0 million, respectively; the average interest rate on borrowings was 3.80% for the quarter and 3.96% for the nine-month period.
Material Changes Versus Prior Comparable Period
- Investment income increased from $0.2 million to $27.2 million for the quarter and from $0.2 million to $53.4 million for the nine months, primarily reflecting rapid portfolio growth.
- The company generated net investment income after taxes of $11.4 million for the quarter and $18.7 million for the nine months, compared with a $0.9 million net investment loss in the 2018 inception period.
- Debt financing and related interest expense were introduced after the 2018 comparison period. Average daily borrowings were $647.9 million for the quarter and $387.6 million for the nine months.
- The investment portfolio expanded from six companies and $262.8 million of fair value at December 31, 2018 to 29 companies and $1.339 billion at September 30, 2019.
- The portfolio became substantially more diversified by industry. Business services, healthcare technology and education represented the largest industry concentrations at 27.7%, 18.8% and 18.1% of fair value, respectively.
- Total investor capital commitments increased to approximately $2.2 billion, including $1.6 billion of undrawn commitments, from approximately $1.8 billion and $1.5 billion undrawn at December 31, 2018.
- Unfunded portfolio-company commitments increased to $179.4 million from $65.1 million at December 31, 2018.
Outlook, Risks, Contingencies and Unusual Items
Management expects cash of $126.7 million, undrawn investor commitments of approximately $1.6 billion and available debt capacity of approximately $329.4 million to support near-term investment activity and operations. The company declared distributions of $0.05, $0.14 and $0.25 per share during the nine months ended September 30, 2019. On October 30, 2019, the Board declared a distribution equal to 90% of estimated fourth-quarter taxable income and net capital gains, if any.
- Investment valuations are predominantly Level 3 and depend on significant unobservable inputs, including market yields, transaction prices and EBITDA multiples. Actual realizable values may differ materially from reported fair values.
- The company uses leverage and was operating with an asset coverage ratio of 185%; declines in portfolio values, increased borrowing costs or covenant breaches could reduce liquidity and investment capacity.
- All debt investments were floating-rate, creating sensitivity to changes in LIBOR and other base rates. The filing also identifies the expected phaseout of LIBOR after 2021 and the potential need to renegotiate portfolio and financing agreements.
- Portfolio investments are generally illiquid, below-investment-grade exposures to middle-market technology-related companies. Economic downturns, portfolio-company underperformance, limited credit availability and reduced exit activity could cause losses.
- Approximately 8.5% of net assets consisted of restricted equity securities at fair value. The portfolio also included co-investments with affiliates under SEC exemptive relief, creating allocation and related-party transaction considerations.
- The company had no pending or threatened material litigation identified by management and no defaults upon senior securities reported.
- The company must maintain BDC and RIC status, satisfy asset-diversification and income requirements, and generally distribute at least 90% of investment company taxable income to preserve RIC treatment.
Investor Verification Points
- Confirm the issuer’s legal name and continuity with the current Blue Owl Technology Finance Corp. metadata, because the filing itself identifies the registrant as Owl Rock Technology Finance Corp.
- Reconcile portfolio fair value, debt balances, asset coverage and borrowing-base availability, particularly given the concentration in Level 3 valuations.
- Assess whether the $179.4 million of unfunded portfolio commitments can be funded under the company’s available debt capacity and remaining investor commitments.
- Review the sustainability of net investment income after management fees, incentive fees and interest expense, rather than relying on portfolio yield alone.
- Evaluate exposure to LIBOR transition, floating-rate movements, leverage and the 150% minimum asset-coverage framework.
- Review concentration in business services, healthcare technology and education, as well as the largest individual portfolio positions.
- Verify distribution coverage, taxable income, dividend reinvestment effects and continued qualification as a RIC and BDC.