Blue Owl Technology Finance Corp. quarterly report, Q3 FY2021

Business Context and Reporting Period

Owl Rock Technology Finance Corp. (now associated with Blue Owl Technology Finance Corp.) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. The company is a Maryland business development company and regulated investment company that originates debt and equity investments in technology-related companies, primarily in the United States.

As of September 30, 2021, the company had investments in 80 portfolio companies with aggregate fair value of $5.4 billion. The portfolio was composed primarily of floating-rate debt, including first-lien senior secured loans, with additional preferred and common equity investments.

Key Financial Metrics

Metric	Three Months Ended September 30, 2021	Nine Months Ended September 30, 2021
Total investment income	$85.8 million	$251.2 million
Net investment income after taxes	$16.7 million	$85.9 million
Net realized gain	$7.8 million	$58.8 million
Net unrealized gain	$219.2 million	$312.1 million
Net increase in net assets from operations	$243.7 million	$456.8 million
Earnings per share	$1.69	$3.73

Total assets were $6.04 billion and net assets were $3.06 billion at September 30, 2021, compared with $3.16 billion and $1.50 billion, respectively, at December 31, 2020.
Net asset value per share increased to $17.91 from $14.88 at year-end 2020.
Total investments at fair value were $5.37 billion, compared with $3.06 billion at December 31, 2020. Fair value exceeded amortized cost by approximately $350.9 million.
Debt had a net carrying value of $2.87 billion, compared with $1.61 billion at year-end 2020. Asset coverage was 204%, compared with 191% at December 31, 2020, and net leverage was 0.75x debt-to-equity.
Cash was $623.2 million at September 30, 2021. The company reported $149.7 million of available debt capacity and approximately $0.5 billion of undrawn investor commitments.
Operating cash flow was negative $1.80 billion for the nine months, primarily reflecting $3.06 billion of investment purchases, partly offset by $1.16 billion of investment proceeds and repayments. Financing activities provided $2.34 billion.
Unfunded portfolio company commitments totaled $390.9 million, compared with $199.5 million at December 31, 2020.

Portfolio Composition and Margins

Based on fair value, the portfolio consisted of 63.9% first-lien senior secured debt, 7.4% second-lien senior secured debt, 3.7% unsecured debt, 14.7% preferred equity and 10.3% common equity.
All debt investments based on fair value carried floating interest rates, subject in certain cases to interest-rate floors. The weighted-average yield of debt and income-producing securities was 7.9% at fair value and 8.0% at amortized cost.
For the nine months, the ratio of total expenses to average net assets was 10.2%, while the ratio of net investment income to average net assets was 5.3%.
No investments were on non-accrual status at September 30, 2021. Management rated 86.4% of the portfolio as investment rating 2, 13.0% as rating 1 and 0.6% as rating 3; none was rated 4 or 5.

Material Changes Versus Prior Comparable Period

Nine-month investment income increased to $251.2 million from $120.7 million, primarily due to growth in the debt investment portfolio. Debt investments at par increased from approximately $2.5 billion to $4.1 billion.
Nine-month net investment income after taxes increased to $85.9 million from $58.7 million, although the increase was slower than the growth in investment income because expenses rose substantially.
Total expenses increased to $161.6 million from $61.6 million. Interest expense increased to $67.3 million from $23.1 million, management fees to $33.5 million from $23.5 million, and incentive fees to $50.8 million from $8.6 million.
Average daily borrowings increased to $2.08 billion from $820.2 million for the nine-month period. The average interest rate increased to 3.84% from 3.26%.
Net unrealized gains increased to $312.1 million from $19.6 million, driven principally by valuation gains in equity and equity-linked investments, including Toast, Remitly Global, Robinhood Markets and Circle Internet Services.
The company issued 68.8 million common shares for aggregate proceeds of $1.175 billion during the nine months, compared with 45.8 million shares and $646.2 million in the prior-year period.
Investment activity expanded materially. Third-quarter new investment commitments increased to $1.36 billion from $349.8 million, while funded investments increased to $1.17 billion from $301.3 million.
Distributions declared increased to $91.3 million for the nine months from $55.7 million. Distributions declared during 2021 were $0.24 per share for the March and June record dates and $0.17 per share for the September record date.

Guidance, Outlook, Risks and Unusual Items

Management did not provide formal earnings guidance. It expects investment income to vary with originations, repayments, portfolio composition and interest rates, and expects repayments may increase based on market conditions and portfolio age.
Management characterized financing and merger-and-acquisition markets as strong, with an active investment pipeline and increased originations. The stated target leverage ratio was 0.90x to 1.25x.
COVID-19-related risks remained material, including supply-chain interruptions, labor difficulties, commodity inflation, market volatility and potential deterioration in portfolio company operating results and valuations.
LIBOR transition presents risks to portfolio investment income, debt valuations and borrowing costs. The company stated that the majority of its LIBOR-linked loans contemplate replacement benchmarks, but some credit agreements may require renegotiation.
Approximately 98.5% of investment fair value was classified as Level 3 or Level 2, with $5.29 billion of investments classified as Level 3. Valuations depend substantially on unobservable market yields, transaction prices and valuation multiples and may differ materially from realizable values.
Restricted securities had fair value of approximately $1.29 billion, or 42.1% of net assets, contributing to liquidity and valuation risk.
Interest-rate sensitivity analysis indicated that a 100-basis-point increase in base rates would reduce annualized net income by approximately $6.3 million under the company’s stated assumptions, while a 50-basis-point increase would reduce it by approximately $6.8 million.
Subsequent to quarter-end, the company completed a $529 million capital call on November 5, 2021, fully called its investor commitments and terminated the Subscription Credit Facility. The same facility had $207.9 million outstanding at September 30, 2021.
On October 27, 2021, the commitment under SPV Asset Facility I was increased from $300 million to $450 million.
The company accrued $3.8 million of federal excise tax for the nine months, compared with $0.3 million in the prior-year period.
Management reported no pending or threatened material litigation, no defaults upon senior securities and effective disclosure controls and procedures.

Most Important Facts for Investors to Verify

Confirm the company’s current legal name, exchange-listing status and any corporate changes following the 2021 Owl Rock filing.
Reconcile the large increase in net asset value and earnings with the concentration of gains in equity-linked holdings and the reliance on Level 3 fair-value estimates.
Review debt maturities, borrowing-base availability, asset-coverage covenants and the impact of the Subscription Credit Facility termination.
Assess whether the $390.9 million of unfunded portfolio commitments can be funded after the investor commitments were fully called.
Evaluate the effect of LIBOR replacement provisions on portfolio yields and borrowing costs.
Review incentive fees accrued on unrealized gains, which were $31.9 million for the nine months, and distinguish those accruals from realized cash economics.
Monitor COVID-19, labor, supply-chain, inflation and technology-sector valuation risks affecting portfolio companies.