425: Blue Owl Technology Finance Corp. Seeks Shareholder Approval for Transformative Merger with OTF II

Blue Owl Technology Finance Corp. is urging shareholders to approve its proposed merger with Blue Owl Technology Finance Corp. II, citing significant benefits including increased scale, diversification, and enhanced financial performance.

Summary

• Blue Owl Technology Finance Corp. (OTF) is soliciting shareholder votes for its proposed merger with Blue Owl Technology Finance Corp. II (OTF II).
• The merger requires approval of the Second Articles of Amendment and Restatement for OTF and the Agreement and Plan of Merger for OTF II.
• The combined entity is projected to have approximately $15.8 billion in total assets as of September 30, 2024, making it a top five BDC and the largest dedicated software-focused BDC.
• The combined portfolio would consist of 77% first lien investments and 81% senior secured investments as of September 30, 2024.
• Credit quality is expected to remain excellent, with less than 0.1% of total investments at fair value on non-accrual and 93% in the highest two internal ratings categories as of September 30, 2024.
• The merger is anticipated to increase OTF's total investments by over 100% and expand the number of portfolio companies to 180, reducing the average position size to less than 0.6% at fair value.
• Operational savings are estimated to be more than $4 million in the first year, and long-term financing cost savings are projected at $15 million annually.
• The combined company is expected to have nearly $300 million in undistributed net investment income and undistributed net capital gains as of September 30, 2024, supporting future dividends.
• The Board of Directors of both BDCs unanimously recommends shareholders vote FOR the proposals.

Sentiment

Score: 9

Explanation: The document presents a highly positive outlook on the proposed merger, emphasizing numerous strategic and financial benefits for shareholders, with a unanimous board recommendation and no explicit negatives of the merger itself.

Positives

• Acquisition of a known, high-quality portfolio of assets with 84% overlap, managed by the same centralized team, mitigating integration risk.
• Strong combined portfolio company metrics, including 77% first lien and 81% senior secured investments, and excellent credit quality with less than 0.1% non-accrual as of September 30, 2024.
• Significant increase in scale and diversification, with pro forma total assets expected to reach approximately $15.8 billion, making it a top five BDC and the largest dedicated software-focused BDC.
• Enhanced positioning for a possible future liquidity event, expected to increase trading liquidity, broaden investor appeal, and expand research coverage.
• Greater access to debt markets and estimated financing cost savings of $15 million annually in the long-term, along with over $4 million in operational savings in the first year.
• Accretive to Net Investment Income (NII) for shareholders due to operational savings, lower financing costs, and improved portfolio-level asset yields.
• 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.

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/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.
• Risk 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, Middle-East 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, work stoppages or accidents), instability in the U.S. and international banking systems, and the risk of recession or a shutdown of government services 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 proposed merger is expected to significantly enhance the combined company's scale, diversification, and positioning for a possible future liquidity event in public markets. It anticipates increased trading liquidity, broader investor appeal, expanded research coverage, and a streamlined organizational structure. Furthermore, the merger is projected to be accretive to Net Investment Income (NII) through operational and financing cost savings, and the substantial undistributed income and gains are expected to support a strong and predictable future public company dividend.

Management Comments

• Craig W. Packer, Chief Executive Officer, stated: 'I believe the proposed merger between OTF and OTF II is a compelling combination that will provide multiple benefits to OTF shareholders.'

Industry Context

This proposed merger positions the combined Blue Owl Technology Finance entity as a significant player in the Business Development Company (BDC) sector, specifically aiming to become the largest dedicated software-focused BDC by total assets. This move reflects a trend towards consolidation and specialization within the direct lending space, particularly in high-growth technology sectors, to achieve greater scale, efficiency, and market presence.

Comparison to Industry Standards

• The combined company is expected to become a top five BDC by total assets, based on publicly available filings as of November 8, 2024.
• The combined company is projected to be the largest dedicated software-focused BDC by total assets, based on publicly available filings as of November 8, 2024, assuming all capital is called and the fund is at target leverage.

Corporate Governance

Legal Proceedings

• The document identifies a risk that shareholder litigation in connection with the Mergers may result in significant costs of defense and liability, but no current proceedings are detailed.

Related Party Transactions

• The merger involves Blue Owl Technology Finance Corp. and Blue Owl Technology Finance Corp. II, both of which employ the same investment strategy and have had substantially the same investments allocated to them by Blue Owl Capital Inc. since OTF II's inception, indicating a related-party consolidation.

Stakeholder Impact

• Shareholders: Expected to benefit from increased scale, diversification, NII accretion, enhanced positioning for a future liquidity event, and a strong, predictable dividend.
• Creditors: Potential for improved cost of debt, more favorable financing terms, and more diverse funding sources due to increased scale and structural simplification.
• Employees/Management: Implied streamlining of organizational structure and potential for talent attraction/retention within the combined entity.

Next Steps

• Shareholders of Blue Owl Technology Finance Corp. are urged to vote FOR the Second Articles of Amendment and Restatement.
• Shareholders of Blue Owl Technology Finance Corp. II are urged to vote FOR the Agreement and Plan of Merger.
• The Special Meeting of Shareholders will be held on March 20, 2025, to vote on the proposals.
• Upon approval, the merger will close.
• The combined company may pursue a future liquidity event in the public markets.

Key Dates

Recommendation

Keywords

Merger, BDC, Business Development Company, Blue Owl Technology Finance Corp, OTF, OTF II, Acquisition, Financial Services, Direct Lending, Software Lending, Shareholder Vote, Proxy Solicitation, Corporate Governance, Investment Portfolio, Net Investment Income, Diversification, Scale, Liquidity Event, Debt Markets, Financing Costs