Business Context and Reporting Period
Company: Owl Rock Capital Corporation (ORCC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2020
Business Overview: ORCC is a Business Development Company (BDC) and Regulated Investment Company (RIC) focused on originating and making senior secured loans, subordinated loans, and mezzanine loans to U.S. middle-market companies. The company also makes equity and equity-related investments. As of March 31, 2020, the portfolio consisted of 101 portfolio companies with an aggregate fair value of $8.9 billion.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net Investment Income (After Taxes) | $146.3 million | $96.0 million |
| Net Increase (Decrease) in Net Assets from Operations | $(312.6) million | $114.5 million |
| Net Asset Value (NAV) Per Share | $14.09 | $15.24 (Dec 31, 2019) |
| Total Investments (Fair Value) | $8.94 billion | $8.80 billion (Dec 31, 2019) |
| Total Debt (Net Carrying Value) | $3.64 billion | $3.04 billion (Dec 31, 2019) |
| Cash and Restricted Cash | $382.9 million | $317.2 million (Dec 31, 2019) |
| Asset Coverage Ratio | 246% | 293% (Dec 31, 2019) |
| Weighted Average Yield (Debt & Income Securities) | 8.4% | 8.7% (Dec 31, 2019) |
Material Changes vs. Prior Period
- Unrealized Losses: The company reported a net unrealized loss of $459.1 million for the quarter, compared to a gain of $18.5 million in Q1 2019. This decline was primarily driven by widening credit spreads and market volatility associated with the COVID-19 pandemic. The fair value of debt investments as a percentage of principal dropped to 93.5% from 98.0% at year-end 2019.
- Investment Income Growth: Total investment income increased to $204.7 million from $151.5 million in the prior year, driven by portfolio growth (par value increased from $7.0 billion to $9.6 billion), partially offset by a decrease in the weighted average yield.
- Expense Increases: Net operating expenses rose to $56.4 million from $53.8 million. This increase was due to higher management fees (driven by asset growth) and professional fees, partially offset by a decrease in interest expense due to lower average interest rates (4.2% vs 4.7%).
- Debt Expansion: Total debt increased by approximately $600 million to $3.64 billion, reflecting new borrowings including the issuance of $500 million in July 2025 Notes and the completion of the CLO III transaction ($395 million).
- Portfolio Ratings: The percentage of investments rated 3 or 4 (indicating increased risk) rose to 11.6% from 5.3% at year-end 2019, attributed to COVID-19 market disruptions.
Guidance, Outlook, and Risks
- COVID-19 Impact: Management expects portfolio companies to be adversely impacted by the pandemic, potentially leading to financial distress, defaults, or reduced interest payments. The company is focused on preserving capital for existing portfolio companies rather than aggressive new originations in the near term.
- Leverage Strategy: The Board approved the application of modified asset coverage requirements (reducing the requirement from 200% to 150%), subject to shareholder approval. Once effective, the company plans to target a debt-to-equity range of 0.90x to 1.25x.
- Fee Waivers: The Adviser waived $42.5 million in management and incentive fees for the quarter. The waiver on the incentive fee is set to expire on the fifteen-month anniversary of the Listing Date (October 2020).
- Stock Repurchases: Under the 10b5-1 Plan, the company repurchased approximately $48.0 million of common stock during the quarter. As of April 30, 2020, an additional $74.3 million was repurchased.
- Risks: Key risks include the duration and magnitude of the economic impact of COVID-19, interest rate volatility (including the decommissioning of LIBOR), and the ability of portfolio companies to meet financial covenants.
Investor Verification Checklist
- Portfolio Valuation: Verify the magnitude of unrealized losses ($459 million) and the specific portfolio companies contributing most to the decline (e.g., Aviation Solutions, H-Food Holdings, Geodigm Corporation).
- Liquidity Position: Confirm the availability of $1.6 billion under credit facilities and the sufficiency of cash ($382.9 million) to meet unfunded commitments ($591.7 million) and debt service obligations.
- Asset Coverage: Monitor the asset coverage ratio (currently 246%) against the regulatory minimum (200%) and the proposed reduction to 150%.
- Fee Waiver Expiration: Track the expiration of the incentive fee waiver in October 2020 and its potential impact on future net investment income.
- Covenant Compliance: Review the status of portfolio companies that have breached financial covenants (e.g., Geodigm Corporation) and the company's strategy for restructuring or support.