425: Blue Owl Technology Finance Corp. Announces Strategic Merger with OTF II to Create Top-Tier BDC

Blue Owl Technology Finance Corporation announced a definitive agreement to merge with Blue Owl Technology Finance Corporation II, aiming to significantly increase scale, diversification, and net investment income accretion for shareholders.

Summary

• Blue Owl Technology Finance Corporation (OTF) entered into a definitive agreement on November 13th, 2024, to merge with Blue Owl Technology Finance Corporation II (OTF II), with OTF continuing as the surviving company.
• The proposed merger is expected to streamline the Blue Owl direct lending platform and combine two complementary, high-quality asset portfolios.
• As of September 30, 2024, approximately 84% of OTF II's investments overlap with OTF's, facilitating portfolio consolidation and mitigating integration risk.
• The combined portfolio, based on September 30, 2024 data, would have 77% first lien investments and 81% senior secured investments, maintaining excellent credit quality with less than 0.1% of total investments on non-accrual and 93% in the highest two internal ratings categories.
• The merger is projected to increase OTF's total investments by over 100% at its target leverage range of 0.90x 1.25x, leading to pro forma total assets of approximately $15.8 billion.
• This scale would position the combined entity as a top five BDC and the largest dedicated software-focused BDC by total assets, with 180 portfolio companies and an average position size of less than 0.6% at fair value.
• The transaction is anticipated to enhance positioning for a possible future liquidity event, increase access to debt markets, generate financing cost savings, and create net investment income accretion.
• Operational savings are estimated to be more than $4 million in the first year, and long-term financing cost savings are estimated at $15 million annually.
• Blue Owl Technology Credit Advisors LLC has agreed to pay transaction fees and expenses up to a cap of $4.75 million upon merger consummation.

Sentiment

Score: 9

Explanation: The document presents an overwhelmingly positive outlook on the merger, highlighting significant financial benefits such as NII accretion, substantial cost savings, increased scale, enhanced market positioning, and improved access to debt markets. The tone is highly confident in the value creation for shareholders.

Positives

• Streamlines the Blue Owl direct lending platform.
• Combines two complementary, high-quality portfolios with significant senior secured investments and excellent credit quality.
• Meaningfully increases scale and diversification, with pro forma total assets expected to reach approximately $15.8 billion.
• Positions the combined company as a top five BDC and the largest dedicated software-focused BDC by total assets.
• Increases the number of portfolio companies to 180 and reduces average position size to less than 0.6%, enhancing diversification and risk mitigation.
• Enhances positioning for a possible future liquidity event, potentially increasing trading liquidity, broadening investor appeal, and expanding research coverage.
• Eliminates a second private-to-public software-focused BDC, reducing potential arbitrage opportunities and streamlining organizational structure.
• Possesses nearly $300 million in undistributed net investment income and undistributed net capital gains as of September 30, 2024, supporting a strong and predictable potential future public company dividend.
• Expected to improve cost of debt and allow for more favorable financing terms, leading to estimated annual savings of $15 million in the long-term.
• Accretive to Net Investment Income (NII) due to operational savings (estimated over $4 million in the first year), lower cost of financing, and improved portfolio-level asset yields.
• Blue Owl Technology Credit Advisors LLC will pay transaction fees and expenses up to $4.75 million, reducing costs for the combined entity.

Risks

• Uncertainties associated with the timing or likelihood of the Mergers closing.
• Risk that expected synergies and savings associated with the Mergers may not be realized.
• Ability to realize the anticipated benefits of the Mergers, including expected accretion to net investment income and elimination or reduction of certain expenses and costs.
• Uncertainty regarding the percentage of OTF and OTF II shareholders voting in favor of the proposals.
• Possibility that competing offers or acquisition proposals will be made.
• Possibility that any or all of the various conditions to the consummation of the Mergers may not be satisfied or waived.
• Risks related to diverting management's attention from ongoing business operations.
• Risk that shareholder litigation in connection with the Mergers may result in significant costs of defense and liability.
• Changes in the economy, financial markets, and political environment.
• Impact of geo-political conditions, including revolution, insurgency, terrorism or war (e.g., Russia-Ukraine, Israel-Hamas conflicts), and general uncertainty surrounding financial and political stability of the United States, United Kingdom, European Union, and China.
• Future changes in law or regulations.
• Conditions to OTF's and OTF II's operating areas, particularly with respect to business development companies or regulated investment companies.
• Economic downturn, elevated interest and inflation rates, ongoing supply chain and labor market disruptions (including strikes), instability in the U.S. and international banking systems, and the risk of recession or government shutdown could impact business prospects.
• Ability of Blue Owl Technology Credit Advisors LLC to locate suitable investments for the combined company and to monitor and administer its investments.
• Ability of Blue Owl Technology Credit Advisors LLC to attract and retain highly talented professionals.

Future Outlook

The combined company is expected to have a more attractive profile for a possible future liquidity event in public markets, with increased trading liquidity, broader investor appeal, and expanded research coverage. The merger is anticipated to lead to net investment income accretion, operational savings of over $4 million in the first year, and long-term annual financing cost savings of $15 million. The combined entity's nearly $300 million in undistributed net investment income and net capital gains is expected to support a strong and predictable potential future public company dividend.

Management Comments

• Craig W. Packer, Chief Executive Officer, believes the proposed merger with OTF II will create meaningful value for OTF and its shareholders in a logical and low-risk way.
• The OTF Board of Directors unanimously recommends that OTF shareholders vote FOR the proposal described in the joint prospectus / proxy statement.
• Voting today will help reduce costs and avoid unnecessary outreach.

Industry Context

This merger represents a significant consolidation within the Business Development Company (BDC) sector, particularly for software-focused direct lending. By combining two complementary portfolios, Blue Owl aims to create a dominant player, becoming a top five BDC and the largest dedicated software-focused BDC by total assets. This move reflects a trend towards larger, more diversified BDCs seeking enhanced market positioning, improved access to capital markets, and operational efficiencies to drive shareholder value.

Comparison to Industry Standards

• The combined company's pro forma total assets of approximately $15.8 billion (as of September 30, 2024, assuming all capital called and fund at target leverage) would make it a top five BDC.
• The combined company would be the largest dedicated software-focused BDC by total assets, based on latest publicly available filings as of November 8, 2024.
• The combined portfolio's credit quality, with less than 0.1% of total investments at fair value on non-accrual and 93% in the highest two internal ratings categories, indicates a strong performance relative to industry benchmarks for credit quality.

Corporate Governance

Legal Proceedings

• Risk of shareholder litigation in connection with the Mergers, which may result in significant costs of defense and liability.

Related Party Transactions

• Blue Owl Technology Credit Advisors LLC, the investment advisor, has agreed to pay transaction fees and expenses up to a cap of $4.75 million, assuming the merger is consummated.

Stakeholder Impact

• Shareholders: Expected to benefit from meaningful value creation, net investment income accretion, operational and financing cost savings, increased scale and diversification, and a strong, predictable potential future public company dividend.
• Employees: Management's attention may be diverted from ongoing business operations due to the merger process.
• Customers (Portfolio Companies): The combined entity will have a larger, more diversified portfolio, potentially offering more robust and stable financing solutions.
• Creditors: Greater scale and structural simplification could improve the cost of debt and allow for more favorable financing terms over time, potentially leading to more diverse funding sources.
• Blue Owl Capital Inc.: The merger will streamline its direct lending platform and consolidate its BDC organizational structure.

Next Steps

• OTF shareholders are urged to vote FOR the merger proposal and the Amended OTF Charter.
• The combined company may pursue a possible future liquidity event subsequent to the transaction.

Key Dates

Recommendation

Keywords

BDC, merger, direct lending, technology finance, Blue Owl, OTF, OTF II, financial services, investment, credit, corporate governance, shareholder vote