NEWS

Owl Rock Capital Corporation (“Owl Rock”) has filed a Registration Statement with the SEC relating to an IPO.

Owl Rock is a non-traded BDC, managed by Owl Rock Capital Advisors, LLC.

We’ve attached both the latest 10-Q and the draft Prospectus.

ANALYSIS

Join The Club

If Owl Rock successfully completes the IPO, the number of public, yield oriented BDCs we track will increase to 46.

(That number will increase to 47 if and when FS-KKR Capital complete their plan of combining several of their non-traded BDCs into a new public vehicle alongside already public FSK).

In anticipation of the Owl Rock IPO, the BDC Reporter had a quick look at the BDC’s latest 10-Q and draft Prospectus.

Here are a few key highlights from this very preliminary review to introduce readers to the new public BDC player:

Formation

Owl Rock “is a Maryland corporation formed on October 15, 2015”.

From March 2016, the BDC began private offerings of equity capital from investors to fund investing activities.

According to the Prospectus, on June 4, 2019, the BDC  delivered a capital drawdown notice to their investors relating to the sale of approximately 103,340,061 shares of  common stock for an aggregate offering price of $1.58 billion.

The sale is expected to close on or around June 17, 2019. Upon completion of this capital call, the investors will not have any remaining undrawn capital commitments.

Ticker Symbol

The proposed ticker symbol on the NYSE will be ORCC.

Owl Rock is based in New York.

Dividend

The BDC has already announced its first dividend as a public company, should the IPO go ahead.

For the quarter ended September 2019, the dividend will be $0.31.

In addition, the BDC announced a series of smaller “Special” distributions totaling $0.38 through the end of 2020.

See the Prospectus for all the details.

That’s an unprecedented approach for a new BDC, especially one without any capital gains.

Asset Growth

As of June 2016, according to its 10-Q, the new entity had $0.5bn in assets.

In the most recent 10-Q for the quarter ended March 31, 2019 total assets had increased to $7.0bn

Total net assets were $4.1bn and total debt was $2.8bn.

NAV Per Share has increased from $14.23 in mid-2016 to $15.26.

Business Model

Owl Rock is almost exclusively a lender, with investment assets 98% invested in first lien, second lien and subordinated debt.

(The bulk of the remaining assets are dedicated to a Joint Venture (the “JV”) with the Regents Of the University of California called Sebago Lake LLC.

The JV is itself exclusively invested in loans, principally senior in nature).

Only $11mn of the close to $7bn in Owl Rock’s portfolio is invested in non-income producing equity in two companies.

According to the 10-Q, the new BDC targets what we describe as upper middle market companies, with an average EBITDA of $80mn and average revenues of $455mn.

Approximately 80% of the portfolio is in senior loan debt, and 17% in second lien debt.

Portfolio Yield

The weighted average yield of the portfolio is 9.4%.

Portfolio Diversification

There are 81 different companies in the portfolio, according to the Prospectus.

We did not have time to check for any individual company concentration by size.

The portfolio appears to be highly diversified by sector, across 27 segments.

Credit Quality

To date, the BDC does not appear to have suffered from any material credit losses.

The BDC’s internal investment rating system – using a traditional 1-5 model – indicates $414mn, or 6.1% of the total, are performing below expectations.

That’s a 3 rating on the scale.

No investments are carried in Categories 4 and 5.

We assume no loans are on non-accrual.

Borrowings

As noted, total debt is $2.8bn, which consists of a mix of secured and unsecured debt.

Besides a Revolver, priced at LIBOR + 2.0%, the BDC has special purpose vehicles, to which assets have been pledged, providing secured financing.

In May 2019, the BDC arranged an on balance sheet CLO financing with a value of $596mn, and supported by loan assets pledged.

The BDC is retaining $206mn of the junior securities in the CLO,

In addition, there are two sets of unsecured notes, one maturing in 2023 and the other in 2024.

Both are placed with institutional investors.

The 2023 issue is for $150mn.

The 2024 issue was raised in April 2019 for $400mn.

Including the 2024 notes brings total debt to $3.2bn.

The interest rate on the notes are 4.75% and 5.25% respectively. (Higher if the BDC loses its investment grade rating.

The BDC appears to have swapped its fixed rate debt obligations for floating.

Manager Compensation

The BDC will be managed by Owl Rock Capital Advisors, LLC.

After going public, compensation terms will change.

The Management Fee is set at 1.5% of assets (excluding cash).

This is the most common fee level for a BDC of its size.

The Incentive Fee includes a 6.0% hurdle rate, and a 17.5% share of net investment income.

By our reading, there is no “look-back” provision.

(That means the Incentive Fee continues to be paid even if NAV drops due to Realized and Unrealized Losses).

The 17.5% is lower than what most BDCs charge but the absence of a “look-back” means Owl Rock lags several of its peers.

Of course, there is a “capital gains” fee as well, but that seems unlikely to be triggered given the nature of the assets.

Earnings

In the most recent quarter investment income was $151mn, expenses $51mn and Net Investment Income $96mn.

In the period, realized gains were immaterial but Unrealized Gains were $18mn.

For the quarter net assets increased by $114mn.

However, these results are not reflective of likely costs and profits once the BDC becomes public.

We will wait to see what analysts are projecting for future earnings.

Real Assets And Real Debt

Combining on balance sheet portfolio assets and the JV portfolio brings total assets under management to $7.3bn.

Total debt, including the JV debt, is $3.1bn on a pro-forma basis, not including the new CLO.

On balance sheet debt to equity (net of cash) is 0.65x.

We’ve not included in our calculation any debt raised after March 31, 2019. (See Borrowings above).

This number will change with the IPO as new capital will be initially used to repay existing debt – presumably the Revolver.

SBCAA

The BDC has not yet elected to adopt the lower asset coverage of 150% allowed by the Small Business Credit Availability Act.

Repurchase Plan

In April 2019, the BDC entered into a $150mn 10b5-1 stock repurchase plan.

The buy-back program – wheres are bought back automatically if the stock price drops below a designated level (in this case: book value)  – will begin 30 days after the IPO and last for 18 months.

Such programs have become increasingly popular with larger BDCs and are intended to lower price volatility.

Manager Backgrounds

The Adviser is an indirect subsidiary of Owl Rock Capital Partners LP (“Owl Rock Capital Partners”).

The Adviser also serves as investment adviser to Owl Rock Capital Corporation II.

Owl Rock Capital Corporation II has elected to be treated as a BDC. Owl Rock Capital Corporation II’s investment objective is similar to Owl Rock’s.

As of March 31, 2019, Owl Rock Capital Corporation II had raised gross proceeds of approximately $576.5 million.

The Adviser is also affiliated with Owl Rock Technology Advisors LLC (“ORTA”) and Owl Rock Capital Private Fund Advisors LLC (“ORCPFA”), which also are investment advisers and subsidiaries of Owl Rock Capital Partners.

The Prospectus provides additional details.

VIEWS

Early Days

The Prospectus is still in draft form, with key numbers still to be input.

Like the IPO price.

In addition, there has been much capital raising activity after the IQ 2019 end which will drastically change equity and debt levels.

Furthermore, compensation expenses will change once the IPO occurs.

A question mark hangs over whether the BDC Board will adopt the SBCAA in the future.

Given all the above and the fact that the portfolio of Owl Rock is still very new, we’ll not be drawing any conclusions about future earnings at this time.

Hint

Of course, the level of the announced dividend indicates that the BDC expects to earn $1.60 or more.

Waiting Game

We will wait till the first quarter after the IPO to evaluate the Dividend Outlook and the Credit Outlook of the BDC as well as writing a SBCAA Status Report, our latest feature.

Non Controversial

Our first impression, though, is that Owl Rock is seeking to be a mainstream BDC, based on its target market,  yield focused strategy and compensation structure.

The debt arrangements appear to be relatively low cost and diversified, which is a plus.

To our eyes, the BDC has much in common with recent larger fund offerings such as Carlyle’s TCG BDC (CGBD) and Bain Capital Specialty Finance (BCSF).

Homework To Do

We don’t yet understand Owl Rock’s origination strategy and whether the BDC intends to compete for leading, arranging and managing its loans or serve in a supporting role.

We expect – given that the BDC has exemptive relief with its sister entities – there will be deal sharing with Owl Rock II and other funds run by the same team.

Likewise, we’ll be learning more in the quarters ahead about Owl Rock’s dividend strategy.

Will the BDC leave a wide berth between earnings and distributions, or run the two close together ?

How does the Special Distribution strategy work and will that extend beyond 2020 ?

And much, much more.

Destination

Then there’s the question of what the longer term ambitions of this fast growing group are.

Currently it’s not unreasonable to expect Owl Rock II might eventually be folded into ORCC in the future, as happened between FSK and CCT and is happening at Golub Capital (GBDC).

That would make Owl Rock’s manager one of the very largest players in an industry where the big are getting very big, as illustrated by what’s happening at FS-KKR Capital.

Bigger is not always better in the world of BDCs, but we’re curious as to where Owl Rock is headed.

Yeah, But What About Right Now ?

We have no view of what should be the “right price” for the BDC’s stock, especially as we do not yet understand how many restricted shares there will be and under what conditions.

One of the hard lessons we’ve learned in our more than a decade investing in BDCs is to sit back and gather as much information as possible before drawing any investment conclusions about new players.

BDCs are not Tesla or Facebook  and we’re unlikely to be missing out on a stock shooting up in price and staying there.

There should not be any FOMO (“Fear Of Missing Out”) where BDC investing is concerned – with all due respect to Owl Rock and any IPOs to come.

We worry more about jumping into the dark into a BDC that is still unproven and very much in metamorphosis.

However, we look forward to learning more – which we’ll share periodically what we’ve learned with our readers.