Before we began an analysis of Owl Rock Capital ‘s (ORCC) December 1, 2020 unsecured note issuance we realized that we’d not published a review of the BDC’s IIIQ 2020 results. To keep our coverage both comprehensive and up to date, here is our assessment of how ORCC performed in the most recent quarter and how that might change in the next year or two:

BDC REPORTER: Undoubtedly, Owl Rock Capital’s (ORCC) IIIQ 2020 results seemed GOOD when all the key metrics are concerned. Net Investment Income Per Share (NIIPS) was $0.33, only 1 cent down from the quarter before and 3 cents from a year ago, when LIBOR was much higher. NAV Per Share continued to improve and was up 1.0% and is only down (4%) YTD. (The sector average is -11%). Underperforming assets remain over $1bn – as per ORCC’s own evaluation – but the number is slightly down and is a GOOD credit rating, with  11.6% of the total portfolio. There are still only two non accruals on the books, same as in the IIQ. One is Swipe Acquisition Corp, which seems destined to become a portfolio company of the BDC is an envisaged debt for equity swap. Also on non accrual is CIBT Global. Geodigm Corporation (dba Dentex)  that was on non-accrual in the IIQ has been returned to performing status and has now been acquired which means that the  “investment was repaid at par, and will result in the full reversal of that unrealized loss in the fourth quarter”. 

However – and this is very important – this was the last quarter of the huge fee waivers granted by the manager when bringing ORCC public. Those went away in October and if we adjust earnings for a post-waiver world, the BDC is a long way from “covering” even its $0.31 regular distribution, let alone the $0.39 paid out all-in quarterly. Yes, leverage is modest at 0.72x by BDC standards and well below the 1.25x debt to equity target. However, when we run the numbers we just don’t see how after waiving ($42mn) this quarter alone, ORCC will be able to afford its distribution going forward. These waivers were a spectacular way to ensure the public BDC’s success, but sustaining even the lowest payout is untenable without making some very aggressive assumptions. These include little or no future credit losses, which seems unlikely in a $9bn portfolio. The analysts seem to agree and project $1.21 of 2021 NIIPS, or just over 30 cents a quarter. Naturally enough we are concerned that – after adjusting for waivers – that ORCC is not currently covering its dividend and may not be able to if fully leveraged and as the $0.32 in special distributions falls away. Not helping is that a goodly portion of income is being generated in PIK form, and not in cash.

The bottom line: We believe there’s a good chance that ORCC – starting in 2022 – may need to cut its $0.31 quarterly dividend. (The $0.08 quarterly special distribution will not continue after 2020).