10-Q: Blue Owl Capital Corporation Reports Third Quarter 2024 Results

Blue Owl Capital Corporation's third quarter 2024 results show a net increase in net assets resulting from operations of $135.4 million.

Summary

• Blue Owl Capital Corporation reported a net increase in net assets resulting from operations of $135.4 million for the third quarter of 2024.
• The company's total investment income was $406.0 million for the quarter.
• Operating expenses totaled $217.6 million for the quarter, including interest expense of $121.3 million, management fees of $49.3 million, and performance-based incentive fees of $39.2 million.
• Net investment income after taxes was $184.9 million for the quarter.
• The company experienced a net change in unrealized gain (loss) of $5.8 million and a net realized loss of $55.3 million.
• As of September 30, 2024, the company's net asset value per share was $15.28.
• The company's portfolio consisted of 75.9% first lien senior secured debt investments, 5.4% second lien senior secured debt investments, 2.3% unsecured debt investments, 2.9% preferred equity investments, 10.6% common equity investments and 2.9% joint ventures.
• The weighted average total yield of the portfolio at fair value was 11.0% and the weighted average spread of total debt investments was 6.4%.

Sentiment

Score: 5

Explanation: The document presents mixed results with positive investment income but negative realized and unrealized gains, and a decrease in net asset value per share. The overall tone is neutral, but the negative results temper the positive aspects.

Positives

• The company's total investment income increased to $406.0 million for the quarter.
• The company's portfolio remains well diversified across industries and geographies.
• The company's weighted average total yield of the portfolio at fair value was 11.0% as of September 30, 2024.

Negatives

• The company experienced a net realized loss of $55.3 million for the quarter.
• The company experienced a net change in unrealized loss of $47.5 million for the nine months ended September 30, 2024.
• The company's net asset value per share decreased to $15.28 as of September 30, 2024 from $15.45 as of December 31, 2023.

Risks

• An economic downturn could impair portfolio companies' ability to operate, leading to potential investment losses.
• Elevated interest and inflation rates, supply chain disruptions, and geopolitical instability could impact business prospects.
• Interest rate volatility could adversely affect results, particularly due to the use of leverage.
• Currency fluctuations could adversely affect results of investments in foreign companies.
• There are risks related to the uncertainty of the value of portfolio investments, particularly those having no liquid trading market.
• The company is subject to the risk of information technology system failures, data security breaches, data privacy compliance, network disruptions, and cybersecurity attacks.
• The company is subject to the risk of geo-political conditions, including revolution, insurgency, terrorism or war.
• The company is subject to the risk of the ability of the parties to consummate the proposed transactions that will result in Blue Owl Capital Corporation III (OBDE) merging with and into the Company (the Mergers) pursuant to an Agreement and Plan of Merger (the Merger Agreement), dated August 7, 2024, among the Company, OBDE, Cardinal Merger Sub, Inc., a Maryland corporation and wholly owned subsidiary of the Company (Merger Sub) and, solely for the limited purposes set forth therein, the Adviser and Blue Owl Diversified Credit Advisers LLC, a Delaware limited liability company and investment advisor to OBDE (ODCA), on the expected timeline, or at all.

Future Outlook

We expect that investment income will vary based on a variety of factors including the pace of our originations and repayments. We expect our earnings to benefit from a prolonged higher rate environment. We believe the opportunity set for private credit will continue to expand even as the public markets remain open. We expect that private equity sponsors will continue to pursue acquisitions and leverage their equity investments with secured loans provided by companies such as us.

Industry Context

The middle-market lending environment provides opportunities for us to meet our goal of making investments that generate attractive risk-adjusted returns. We believe that regulatory and structural factors, industry consolidation and general risk aversion, limit the amount of traditional financing available to U.S. middle-market companies. We believe that many commercial and investment banks have, in recent years, de-emphasized their service and product offerings to middle-market businesses in favor of lending to large corporate clients and managing capital markets transactions. We also believe that there is a lack of market participants that are willing to hold meaningful amounts of certain middle-market loans. As a result, we believe our ability to minimize syndication risk for a company seeking financing by being able to hold its loans without having to syndicate them, coupled with reduced capacity of traditional lenders to serve the middle-market, present an attractive opportunity to invest in middle-market companies.

Comparison to Industry Standards

• The document does not provide specific comparisons to industry standards or benchmarks.
• However, the document does state that the company believes that historical middle-market default rates have been lower, and recovery rates have been higher, as compared to the larger market capitalization, broadly distributed market, leading to lower cumulative losses.
• The document also states that the company believes that BDC managers expertise in credit selection and ability to manage through credit cycles has generally resulted in BDCs experiencing lower loss rates than U.S. commercial banks through credit cycles.

Management Changes

Related Party Transactions

• The Company has entered into a number of business relationships with affiliated or related parties, including the Investment Advisory Agreement, the Administration Agreement, and the License Agreement.
• The Company, the Adviser and certain of its affiliates have been granted an order for exemptive relief by the SEC to co-invest with other funds managed by the Adviser or its affiliates.
• The Company invests in Wingspire, Amergin AssetCo, Fifth Season, OBDC SLF and Credit SLF, controlled affiliated investments, as defined in the 1940 Act.
• The Company invests in LSI Financing, a non-controlled affiliated investment, as defined in the 1940 Act.

Stakeholder Impact

• Shareholders may experience fluctuations in the value of their investment due to market conditions and the performance of portfolio companies.
• Shareholders will receive quarterly distributions, which may be impacted by the company's performance and investment decisions.
• Shareholders will be subject to the same U.S. federal, state and local tax consequences as if they received cash distributions if they receive distributions in the form of shares of common stock.

Next Steps

• The company intends to continue to make investments that generate attractive risk-adjusted returns.
• The company intends to continue to monitor its portfolio companies on an ongoing basis.
• The company intends to continue to evaluate and enter into strategic portfolio transactions which may result in additional portfolio companies which we are considered to control.

Key Dates

Keywords

middle-market lending, senior secured loans, private credit, direct lending, debt investments, equity investments, collateralized loan obligations, asset-based lending, financial services, healthcare, technology