10-Q: Blue Owl Capital Reports Q3 2025: Growth Amidst NAV Decline

Blue Owl Capital Corporation reported increased investment income and net assets for Q3 2025, but saw a decline in Net Asset Value per share and Earnings Per Share, alongside a planned merger with Blue Owl Capital Corporation II.

Summary

• Total investments at fair value increased to $17.14 billion as of September 30, 2025, from $13.19 billion at December 31, 2024.
• Net assets grew to $7.61 billion as of September 30, 2025, up from $5.95 billion at December 31, 2024.
• Net Asset Value per share decreased to $14.89 as of September 30, 2025, from $15.26 at December 31, 2024.
• Total investment income for the nine months ended September 30, 2025, rose to $1.40 billion, compared to $1.20 billion for the same period in 2024.
• Net investment income after taxes for the nine months ended September 30, 2025, increased to $608.1 million, up from $556.8 million in 2024.
• Earnings Per Share for the nine months ended September 30, 2025, decreased to $1.01, from $1.13 in 2024.
• The company reported a net change in unrealized gain of $39.5 million for the nine months ended September 30, 2025, a reversal from a $47.5 million loss in the prior year.
• Net realized loss for the nine months ended September 30, 2025, significantly increased to $139.3 million, from $69.2 million in 2024.
• Non-accrual debt investments increased to 3.2% of the portfolio at amortized cost as of September 30, 2025, from 2.2% at December 31, 2024.
• The company's asset coverage ratio remained stable at 178% as of September 30, 2025, well above the 150% regulatory minimum.
• A merger agreement with Blue Owl Capital Corporation II (OBDC II) was entered into on November 5, 2025, anticipated to close in Q1 2026.
• The company approved a new stock repurchase program of up to $200 million on November 4, 2025.

Sentiment

Score: 6

Explanation: While net investment income and total assets grew, NAV per share and EPS declined, and realized losses increased. The company is actively managing its portfolio and expanding its reach, but faces challenges in unrealized losses and non-accrual investments. The upcoming merger with OBDC II presents both opportunities and risks.

Positives

• Total investments at fair value increased significantly to $17.14 billion, demonstrating strong asset growth.
• Total investment income for the nine months ended September 30, 2025, grew to $1.40 billion, indicating robust revenue generation.
• Net investment income after taxes for the nine months ended September 30, 2025, increased to $608.1 million.
• The net change in unrealized gain for the nine months ended September 30, 2025, was positive $39.5 million, a notable improvement from a $47.5 million loss in the prior year.
• The asset coverage ratio remained strong at 178%, comfortably exceeding the 150% regulatory requirement.
• Exited investments since 2016 have generated an aggregate cash flow realized gross internal rate of return of approximately 10%.
• Portfolio companies (excluding certain investments) exhibit strong financial health with weighted average annual revenue of $1.02 billion and EBITDA of $229 million.
• The portfolio is highly diversified, with an average investment size of less than 0.5% and the top ten investments representing less than 25% of the total portfolio.
• Strategic focus on upper middle-market businesses in non-cyclical, recession-resistant industries like healthcare, business services, technology, and insurance brokerage.
• The company leverages its scale to lead or co-lead transactions, structuring favorable terms and providing flexible solutions.
• Expansion into cross-platform opportunities, including specialty financing and joint ventures like Blue Owl Leasing, is expected to enhance consistent income.
• Matthias Ederer, a Senior Managing Director at Blue Owl, joined the Diversified Lending Investment Committee, strengthening management expertise.

Negatives

• Net Asset Value per share decreased to $14.89 from $15.26, indicating a decline in shareholder equity value.
• Earnings Per Share for the nine months ended September 30, 2025, decreased to $1.01 from $1.13 in the prior year.
• Net realized loss for the nine months ended September 30, 2025, significantly increased to $139.3 million from $69.2 million in 2024.
• The weighted average total yield of the portfolio decreased to 9.8% from 10.4%, and the yield of accruing debt and income-producing securities decreased to 10.3% from 11.1%.
• Non-accrual debt investments increased to 3.2% of the portfolio at amortized cost, up from 2.2% at December 31, 2024.
• Total operating expenses increased to $786.3 million for the nine months ended September 30, 2025, from $634.4 million in 2024, driven by higher interest expense and management fees.
• Payment-in-kind (PIK) income as a percentage of total investment income decreased to 9.5% for the three months ended September 30, 2025, from 13.5% in the prior year, and to 9.8% for the nine months, from 13.3%.
• The purchase discount from the OBDE Mergers, while initially recognized as unrealized appreciation, will amortize over time, potentially impacting future interest income and unrealized depreciation.

Risks

• An economic downturn could impair portfolio companies' ability to operate, leading to losses on investments.
• Elevated inflation rates, fluctuating interest rates, supply chain and labor market disruptions, and instability in banking systems could impact business prospects.
• Interest rate volatility could adversely affect results, particularly due to the use of leverage in the investment strategy.
• Currency fluctuations could negatively impact investments in foreign companies, especially if payments are received in foreign currency.
• Competition from other entities and affiliates for investment opportunities may intensify.
• The valuation of illiquid portfolio investments is inherently uncertain and may differ significantly from realized values.
• Reliance on borrowed money to finance investments exposes the company to increased risk.
• The ability to qualify for and maintain tax treatment as a Regulated Investment Company (RIC) and Business Development Company (BDC) is crucial.
• Information technology system failures, data security breaches, and cybersecurity attacks pose operational risks.
• Geopolitical conditions, including ongoing conflicts and political unrest, could impact financial market volatility and global economic markets.
• The proposed merger with Blue Owl Capital Corporation II (OBDC II) may not be consummated on the expected timeline or at all, or the anticipated benefits may not be realized.
• The OBDC II Mergers could trigger change of control provisions in existing contracts, potentially leading to termination or increased obligations.
• The announcement and pendency of the OBDC II Mergers could disrupt business operations and affect relationships with borrowers.
• Shareholders will experience a reduction in percentage ownership and voting power in the combined company post-merger.
• Investments in covenant-lite loans may provide fewer rights against a borrower and carry a greater risk of loss.
• Concentration of cash balances with a single highly-rated money center bank exposes the company to counterparty risk.
• Persistent inflationary pressures could negatively affect portfolio companies' profit margins.

Future Outlook

The company anticipates its general and administrative expenses to increase in dollar terms but decline as a percentage of total assets during periods of asset growth. Investment income is expected to vary based on origination and repayment pace, with earnings benefiting from a prolonged higher interest rate environment due to the predominantly floating rate portfolio. The merger with Blue Owl Capital Corporation II is expected to close in the first quarter of 2026, with both companies intending to pay ordinary course dividends beforehand. The company plans to distribute annually all or substantially all investment company taxable income to maintain its RIC status and may carry forward taxable income with a 4% excise tax. The 2025 Stock Repurchase Program will terminate 18 months from November 4, 2025, unless extended. The company believes its liquidity and capital sources are adequate for short and long-term needs and may pursue additional financing or debt issuances.

Management Comments

• Our platform continues to find attractive investment opportunities for deployment, predominantly in first lien originations to large borrowers.
• We have seen an increase in deal activity and, consistent with our last several quarters, a substantial portion of our financings are with existing borrowers, reflecting the advantage of incumbency and scale and allowing us to support their continued growth and maintain the credit quality of our portfolio.
• We continue to focus on investing in upper middle-market businesses in non-cyclical industries we view as recession resistant and that we are familiar with, including defensive service-oriented sectors that provide intangible mission-critical solutions and products such as healthcare, business services, technology and insurance brokerage.
• These companies have diversified revenue streams, strong recurring cash flow profiles and healthy liquidity.
• Blue Owl serves as the lead, co-lead or administrative agent on many of our investments and the majority of our investments are supported by sophisticated financial sponsors who provide operational and financial resources.
• Our borrowers have a weighted average EBITDA of approximately $229 million (up from approximately $115 million in 2021) and average revenue of approximately $1 billion (up from approximately $500 million in 2021) and we believe this scale contributes to the durability of our borrowers and their ability to adapt to different economic environments.
• Blue Owl's direct lending strategy continues to invest in, and is often the lead lender or administrative agent on, transactions in excess of $1 billion in size, which gives us the ability to structure the terms of such deals to maximize deal economics and credit protection and provide customized flexible solutions.
• The average hold size of Blue Owl's direct lending strategy's new investments is approximately $350 million (up from approximately $200 million in 2021) and average total new deal size is approximately $1.5 billion (up from approximately $600 million in 2021).
• We believe that the construction of our current portfolio coupled with our experienced investment team and strong underwriting standards leave us well-positioned for the current economic environment.
• Many of the companies in which we invest are continuing to see modest growth in both revenues and EBITDA.
• Across the portfolio we are not seeing a meaningful increase in amendment activity, requests for increased revolver borrowings, missed payments or other signs of an overall, broad deterioration in our results or those of our portfolio companies at this time.
• We also continue to leverage the expanding role that private lenders are being asked to play in the broader credit markets to evaluate cross-platform opportunities including strategic equity and accretive joint venture investments that have cash flow and credit profiles that provide consistent income.

Industry Context

The company operates within a middle-market lending environment that it believes offers attractive risk-adjusted returns, characterized by limited capital availability from traditional banks due to regulatory and structural factors. The capital markets, including underwritten bond and syndicated loan markets, remain challenging for middle-market companies. Private credit, however, is seen as a stable and reliable capital source, with increasing demand from financial sponsors and companies seeking private solutions for scale, certainty, and flexibility. This dynamic creates attractive pricing and more favorable terms for lenders in directly negotiated financings. The company's strategy aligns with secular trends supporting private credit growth, focusing on senior secured loans with floating rates for defensive characteristics and a superior return profile in a rising interest rate environment.

Comparison to Industry Standards

• The company defines middle-market companies as those with EBITDA between $25 million and $500 million annually and/or annual revenue of $125 million to $5 billion, which significantly overlaps with GE Capital's definition of $10 million to $1 billion in annual revenue.
• The company's portfolio companies (excluding certain investments) had weighted average annual revenue of $1.02 billion, an increase from approximately $500 million in 2021, and weighted average annual EBITDA of $229 million, up from approximately $115 million in 2021, indicating growth in the scale of its target companies.
• The average hold size of Blue Owl's direct lending strategy's new investments is approximately $350 million, an increase from approximately $200 million in 2021, reflecting larger transaction capabilities.
• The average total new deal size for Blue Owl's direct lending strategy is approximately $1.5 billion, up from approximately $600 million in 2021, demonstrating increased market presence and capacity.
• 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.
• The company also believes that historical middle-market default rates have been lower, and recovery rates higher, compared to the larger market capitalization, broadly distributed market.

Management Changes

Corporate Governance

Legal Proceedings

• Neither the company nor the Adviser are currently subject to any material legal proceedings, nor are any material legal proceedings threatened against them.
• Litigation filed against the company and OBDC II in connection with the OBDC II Mergers could result in substantial costs and could delay or prevent the OBDC II Mergers from being completed.

Related Party Transactions

• The company has an Investment Advisory Agreement with Blue Owl Credit Advisors LLC (the Adviser) for investment advisory and management services.
• An Administration Agreement is in place with the Adviser for administrative services, with the company reimbursing certain costs.
• A License Agreement grants the company a non-exclusive license to use the 'Blue Owl' name from an affiliate of Blue Owl.
• The company co-invests with affiliates (other funds managed by the Adviser or its affiliates) under an exemptive relief order from the SEC.
• Investments are made in controlled, affiliated companies including Credit SLF, Wingspire Capital Holdings LLC, Amergin AssetCo, Fifth Season Investments LLC, and LSI Financing LLC.
• Investments are made in non-controlled, affiliated companies including LSI Financing 1 DAC and Blue Owl Cross-Strategy Opportunities LLC (BOCSO).
• Blue Owl Leasing was formed as a joint venture with other Blue Owl entities and institutional partners.
• The Adviser provides consulting services to a subsidiary of LSI Financing LLC and waives a portion of the management fee payable by the company equal to the pro rata amount of such consulting fee.

Stakeholder Impact

• Shareholders may experience changes in Net Asset Value per share, Earnings Per Share, and dividend distributions. The upcoming merger with OBDC II will result in a reduction of percentage ownership and voting power in the combined entity.
• Portfolio companies benefit from direct lending and strategic investments, but their performance is closely monitored, and underperforming assets may undergo restructuring.
• Employees of the Adviser and its affiliates involved in company operations (e.g., Chief Compliance Officer, Chief Financial Officer) have their compensation reimbursed by the company.
• Lenders and creditors are impacted by the company's debt obligations, asset coverage ratio, and adherence to covenants, with new debt issuances and credit facilities affecting their exposure.
• Regulatory bodies oversee the company's compliance with BDC and RIC requirements, as well as other federal and state securities laws.

Next Steps

• Consummation of the OBDC II Mergers, anticipated during the first quarter of 2026.
• OBDC II plans to file a proxy statement/prospectus with the SEC and mail it to its shareholders.
• The company plans to file a registration statement on Form N-14 with the SEC.
• The company and OBDC II intend to declare and pay ordinary course dividends prior to the OBDC II Mergers closing.
• OBDC II may declare a dividend to its shareholders equal to undistributed net investment income estimated to be remaining as of the closing of the OBDC II Mergers, subject to board approval.
• The 2025 Stock Repurchase Program will terminate 18 months from November 4, 2025, unless extended by the Board.
• The company may enter into additional credit facilities, increase existing ones, enter into debt securitization transactions, or issue additional debt securities.

Key Dates

Recommendation

While the company demonstrates strong growth in total assets and investment income, the decline in NAV per share and EPS, coupled with increased non-accrual investments and significant realized losses, indicates underlying challenges. The upcoming merger with OBDC II introduces both potential synergies and integration risks. A 'Hold' recommendation is appropriate as investors should monitor the successful integration of the merger and the company's ability to stabilize NAV and improve earnings per share amidst a dynamic market and rising non-accrual rates. The strategic focus on upper middle-market and specialty finance is positive, but execution and market conditions will be critical.

Keywords

Blue Owl Capital, BDC, Business Development Company, Direct Lending, Middle Market, Senior Secured Loans, Private Credit, Investment Income, Net Asset Value, SEC Filing, OBDC, Merger, OBDC II, Portfolio Investments, Financial Results, Credit Market, Asset Coverage Ratio, Unrealized Gains, Unrealized Losses, Non-accrual Loans, Dividend, Stock Repurchase