Business Context and Reporting Period
Blue Owl Technology Finance Corp. is identified in the filing as Owl Rock Technology Finance Corp. 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. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, with comparisons to the corresponding 2021 periods.
As of June 30, 2022, the company had investments in 104 portfolio companies with aggregate fair value of $6.0 billion. The portfolio was primarily floating-rate debt, with 100.0% of debt investments based on fair value bearing floating rates.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 |
|---|---|---|
| Total investment income | $107.5 million | $214.9 million |
| Net investment income after taxes | $67.5 million | $132.8 million |
| Net realized gain | $36.8 million | $41.1 million |
| Net unrealized gain (loss) | $(248.0) million | $(352.8) million |
| Net increase (decrease) in net assets from operations | $(143.7) million | $(178.9) million |
| Basic and diluted earnings per share | $(0.71) | $(0.89) |
Net investment income before taxes was $70.9 million for the quarter and $138.3 million for the six months. Total expenses were $36.6 million and $76.7 million, respectively, including interest expense of $28.7 million and $55.8 million and management fees of $13.9 million and $27.9 million. Incentive fees were negative $9.4 million for the quarter and negative $13.3 million for the six months because previously accrued capital-gains incentive fees were reversed following portfolio valuation losses.
- Net assets were $3.279 billion at June 30, 2022, compared with $3.532 billion at December 31, 2021.
- NAV per share was $16.29, down from $17.65 at year-end 2021.
- Investments at fair value were $5.9999 billion, versus $6.1389 billion at December 31, 2021.
- Cash was $115.8 million; available borrowing capacity was $477.5 million.
- Total debt at net carrying value was $2.8264 billion, compared with $2.6438 billion at year-end 2021.
- Asset coverage was 214%, compared with 231% at December 31, 2021; reported net leverage was 0.84x debt-to-equity.
- Weighted-average total portfolio yield at fair value was 7.6%; yield on debt and income-producing securities was 8.8%.
- The portfolio’s debt investments were 68.0% first-lien senior secured, 9.0% second-lien senior secured and 4.0% unsecured; preferred and common equity represented 12.7% and 6.3%, respectively.
Cash Flow, Liquidity and Debt
Operating activities used $135.4 million of cash during the six months ended June 30, 2022. The company funded $562.1 million of investment purchases and received $434.8 million from investment sales and repayments. Financing activities provided $144.1 million, including net borrowings, partially offset by $59.0 million of distributions paid. Cash increased from $107.0 million at year-end 2021 to $115.8 million.
Debt commitments totaled $3.525 billion, of which $2.8565 billion was outstanding principal. The principal debt facilities included the $1.04 billion Revolving Credit Facility, $450 million SPV Asset Facility I, $300 million SPV Asset Facility II, unsecured notes due 2025 through 2027, and $200 million of CLO 2020-1 secured notes. Contractual debt obligations totaled $2.8565 billion, with $2.3665 billion scheduled within three to five years and $490.0 million after five years.
Unfunded portfolio company commitments increased to $439.6 million from $390.8 million at December 31, 2021. Management stated that available borrowing capacity and other financial resources were sufficient to cover these commitments and near-term operating needs.
Material Changes Versus Prior Comparable Period
- Investment income increased 8.7% for the quarter and 29.9% for the six months, primarily reflecting portfolio growth and higher PIK income.
- PIK interest income rose to $21.3 million for the quarter and $38.5 million for the six months, compared with $8.4 million and $16.0 million, respectively, in 2021. PIK income is accrued rather than received in cash.
- One-time prepayment fees declined substantially: approximately $0.5 million in the quarter and $2.6 million for the six months, versus $26.4 million and $30.8 million in the comparable 2021 periods.
- Expenses declined because of the reversal of capital-gains incentive fees, despite higher management fees and interest expense. Average daily borrowings increased to $2.7 billion from $2.2 billion for the quarter and to $2.7 billion from $1.9 billion for the six months.
- Portfolio fair value declined by $138.9 million from year-end 2021, while amortized cost increased by $237.4 million. The decline was driven primarily by unrealized losses and market repricing.
- Net unrealized losses of $247.7 million for the quarter and $352.5 million for the six months replaced the unrealized gains reported in 2021. Management attributed the losses primarily to market volatility, wider credit spreads and declines in publicly traded technology investments.
- Investment originations slowed materially. Second-quarter new investment commitments were $303.6 million, compared with $1.442 billion in the prior-year quarter; investments funded were $210.5 million versus $1.349 billion.
Guidance, Outlook, Commentary and Risks
Management expects repayments and originations to remain modest because of rising interest rates, reduced refinancing activity, market uncertainty and lower merger-and-acquisition activity. It stated that portfolio credit quality remained consistent and that the company continued to focus on recession-resistant, service-oriented sectors such as software.
Management expects the rapid rise in interest rates to meaningfully benefit net investment income beginning in the third quarter as reference rates exceed portfolio interest-rate floors. The company estimates that a 100-basis-point increase in base rates would increase annualized net income by approximately $36.6 million before income-based fees, assuming no changes in portfolio or borrowing structure.
Principal risks include valuation uncertainty for predominantly Level 3 investments, credit losses, illiquidity, leverage, interest-rate volatility, LIBOR transition, foreign-currency exposure, inflation, supply-chain disruption, COVID-19 effects, geopolitical events including the Russia-Ukraine conflict, and the ability of portfolio companies to meet obligations. As of June 30, 2022, no investments were on non-accrual status, although investments rated 3 or 4 increased to 2.4% of the portfolio from 0.5% at year-end 2021.
Restricted securities had fair value of approximately $1.069 billion, or 32.6% of net assets. Approximately 95.6% of investments at fair value were Level 3 or otherwise subject to substantial valuation judgment. The company also disclosed estimated aggregate gross unrealized losses for tax purposes of $235.7 million and gross unrealized gains of $110.1 million.
The Board declared a distribution of $0.23 per share for shareholders of record on June 30, 2022, payable August 15, 2022. On August 2, 2022, it declared a third-quarter distribution based on 90% of estimated investment company taxable income, with a potential additional capital-gains distribution. The filing provides no fixed earnings or NAV guidance.
Most Important Facts for Investors to Verify
- Reconcile the company name in the request metadata with the filing, which is filed under Owl Rock Technology Finance Corp.
- Assess whether the large unrealized losses and lower NAV reflect temporary market repricing or deterioration in underlying portfolio company credit quality.
- Monitor the growth of PIK income and determine how much reported investment income converts to cash.
- Review debt maturities, borrowing-base availability, asset-coverage compliance and the $439.6 million of unfunded investment commitments.
- Evaluate sensitivity to further increases in interest rates, including the effect on both portfolio income and borrowing costs.
- Review valuation methodologies and the concentration of assets in Level 3 and restricted securities.
- Verify the sustainability and tax composition of distributions, including the portion potentially funded from sources other than current ordinary income.
- Track LIBOR replacement provisions and the company’s transition to SOFR and other reference rates.