Business Context and Reporting Period
Blue Owl Technology Finance Corp. was identified in the request metadata; the filing is presented under its former name, Owl Rock Technology Finance Corp. This unaudited Form 10-Q covers the three months ended March 31, 2022, with balance-sheet comparisons to December 31, 2021 and operating comparisons to the three months ended March 31, 2021.
The company is a business development company and regulated investment company focused primarily on originating debt and equity investments in technology-related companies, principally in the United States. The portfolio was managed by Owl Rock Technology Advisors LLC, an indirect subsidiary of Blue Owl Capital Inc.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change or comparison |
|---|---|---|---|
| Total investment income | $107.5 million | $66.5 million | Up approximately 62% |
| Net investment income after taxes | $65.3 million | $25.4 million | Up approximately 157% |
| Net change in unrealized gains/(losses) | $(104.9) million | $41.8 million | Shifted to a significant loss |
| Net realized gains | $4.3 million | $1.0 million | Higher than prior period |
| Net increase/(decrease) in net assets from operations | $(35.3) million | $68.3 million | Shifted to a loss |
| Basic and diluted loss/(earnings) per share | $(0.18) | $0.66 | Shifted to a loss |
| Distribution declared per share | $0.24 | $0.24 | Unchanged |
| Net asset value per share, period end | $17.24 | $15.32 | Prior-year period-end comparison; down from $17.65 at December 31, 2021 |
Investment income was driven primarily by interest income of $81.3 million, PIK interest income of $17.2 million, dividend income of $8.1 million and other income of $0.9 million. PIK interest represented approximately 16% of investment income, meaning a meaningful portion of reported income was not received in cash during the period.
Total expenses were $40.1 million versus $40.6 million in the prior-year quarter. Interest expense increased to $27.1 million from $20.0 million, and management fees increased to $14.0 million from $10.6 million. Incentive fees were a $(3.9) million expense benefit in Q1 2022, compared with $7.6 million of expense in Q1 2021, primarily because of portfolio unrealized losses. Net investment income after taxes represented approximately 61% of investment income in Q1 2022, compared with approximately 38% in Q1 2021.
Portfolio, Debt and Liquidity
- Total investments at fair value were $6.10 billion at March 31, 2022, compared with $6.14 billion at December 31, 2021. The portfolio included 96 companies.
- At fair value, the portfolio consisted of 65.4% first-lien senior secured debt, 8.9% second-lien senior secured debt, 3.4% unsecured debt, 14.8% preferred equity and 7.5% common equity.
- Systems software, application software and health care technology were the largest industry concentrations at 19.3%, 15.2% and 12.4% of portfolio fair value, respectively.
- All debt investments were floating-rate based on fair value. The weighted-average total portfolio yield was 6.7%; the weighted-average yield on debt and income-producing securities was 8.0%.
- Total debt at net carrying value was $2.72 billion, up from $2.64 billion at year-end. Outstanding principal was $2.75 billion, with $578.3 million of available borrowing capacity.
- The asset coverage ratio was 225% at March 31, 2022, compared with 231% at December 31, 2021, above the statutory 150% minimum described in the filing. Net leverage was 0.75x debt-to-equity.
- Cash was $144.4 million at period end. Operating activities used $15.4 million of cash, financing activities provided $52.8 million, and ending cash increased from $107.0 million at year-end.
- Unfunded portfolio company commitments were $391.3 million, broadly unchanged from $390.8 million at December 31, 2021. Management stated that available resources were sufficient to fund these commitments.
Material Changes Versus Prior Comparable Period
- Investment income increased substantially as the debt investment portfolio grew; debt investments at par increased from approximately $2.9 billion at March 31, 2021 to approximately $4.8 billion at March 31, 2022.
- Investment activity moderated: new investment commitments were $296.4 million versus $460.9 million, funded investments were $260.4 million versus $439.2 million, and investments sold or repaid were $206.7 million versus $311.5 million.
- The portfolio recorded a $104.9 million net unrealized loss, versus a $41.8 million net unrealized gain in the prior-year quarter. Management attributed the loss primarily to market volatility, wider credit spreads and declines in publicly traded investments. Toast and Remitly were the largest negative contributors, while UserZoom was the largest positive contributor.
- Net assets declined to $3.46 billion from $3.53 billion at December 31, 2021, and NAV per share declined from $17.65 to $17.24 during the quarter.
- Average daily borrowings increased to approximately $2.75 billion from $1.65 billion, while the average interest rate on borrowings decreased to 3.71% from 4.35%.
- No capital call notices were issued in Q1 2022 because investor capital commitments had been fully drawn as of November 5, 2021.
Guidance, Outlook, Commentary and Risks
The filing does not provide formal earnings or portfolio guidance. Management expects investment income to vary with originations, repayments, portfolio composition and market conditions, and expects repayments may increase based on the age of the portfolio. Management also stated that the financing and mergers-and-acquisitions markets remained active but faced headwinds from persistent inflation, rising interest rates, geopolitical events and the continuing effects of COVID-19.
The company declared a subsequent distribution equal to 90% of estimated second-quarter investment company taxable income, if any, plus an additional amount of net capital gains if taxable income is less than 6% of weighted-average capital called since inception. The distribution is for shareholders of record on June 30, 2022 and is payable on or before August 15, 2022.
- Fair-value risk is significant: approximately $5.75 billion, or most of total investments, was classified as Level 3 and valued using unobservable inputs. Changes in market yields, credit spreads, transaction prices and valuation multiples may materially affect NAV.
- Interest-rate exposure is material. Substantially all debt investments were floating-rate, but borrowings also bear floating rates, and interest-rate movements may affect both income and expense. The filing also identifies LIBOR transition risk.
- COVID-19 effects, supply-chain interruptions, labor constraints, inflation, economic downturns and the Russia-Ukraine conflict may adversely affect portfolio companies, valuations, financing access and repayment activity.
- The portfolio contains illiquid, speculative and below-investment-grade investments, including PIK instruments and equity securities. PIK income may not produce current cash and may ultimately be difficult to collect.
- The company had no investments on non-accrual status at March 31, 2022, and no material pending or threatened litigation was reported.
- The company relies on BDC and RIC status, required distributions and compliance with asset diversification and qualifying-asset requirements. Non-qualifying assets represented 21.0% of total assets at March 31, 2022.
Important Facts for Investors to Verify
- Reconcile the $104.9 million unrealized loss to portfolio-level valuation changes, particularly public-equity exposures and widening credit spreads.
- Assess the sustainability and cash conversion of reported net investment income, including $17.2 million of PIK interest and the effect of incentive-fee reversals.
- Review debt maturities and refinancing requirements, including $860 million of notes due in 2025, $375 million due in 2026 and $300 million due in 2027, in addition to secured facilities.
- Confirm borrowing-base availability, asset-coverage compliance and capacity to fund the $391.3 million of unfunded portfolio commitments under stressed valuations.
- Evaluate concentration and liquidity risks in the Level 3 portfolio, technology-related industries, publicly traded holdings and restricted securities.
- Verify the company’s continuing RIC and BDC tax and regulatory status, quarterly distribution policy and future exchange-listing or wind-down implications.