BDC IPO: Owl Rock Capital (ORCC) $7 Billion Portfolio 82% First-Lien

The following is a quick update that was previously provided to subscribers of Premium Reports along with revised target prices, dividend coverage and risk profile rankings, credit issues, earnings/dividend projections, quality of management, fee agreements, and my personal positions on all business development companies (“BDCs”) please see Deep Dive Reports

Quick Update:

NEW YORK (July 17, 2019) – Owl Rock Capital Corporation, Inc. (“ORCC”) today announced that it priced its initial public offering of 10,000,000 shares of common stock at $15.30 per share. Shares of common stock of ORCC are expected to begin trading on the New York Stock Exchange on July 18, 2019, under the symbol “ORCC.” ORCC also granted the underwriters an option to purchase up to an additional 1,500,000 shares of its common stock. The closing of the offering is subject to customary closing conditions and the shares are expected to be delivered on or about July 22, 2019.

 

Upcoming ORCC IPO:

Owl Rock Capital Corporation (ORCC) is an externally managed BDC with investments in 81 portfolio companies valued at $6.8 billion that expects its initial public offering to be priced tomorrow:

  • Expected pricing of $15.30-$16.30 per share (a premium to its estimated NAV per share of  $15.27 to $15.30).
  • Size of offering 9.5 million shares, raising ~$150M based on midpoint of anticipated range; expects green shoe option of 15%.
  • Plans to use proceeds to pay down outstanding debt, to make investments according to its investment objectives, and for general corporate purposes.

Owl Rock Capital Partners, together with its subsidiaries, is a New York-based direct lending platform with approximately $13.4 billion of assets under management as of March 31, 2019.

Upcoming ORCC Distributions

On May 28, 2019, the Board declared a distribution of $0.31 per share, for shareholders of record on September 30, 2019, payable on or before November 15, 2019. This distribution is only payable if this offering has commenced on or before September 30, 2019. The Board also declared the following special distributions which are only payable if this offering has commenced on or before September 30, 2019. Newly offered shares WILL be entitled to receive these distributions (as well as the $0.31).

Assuming that the regular quarterly dividend remains at $0.31 per share would imply that new investors will receive a total of:

  • $0.33 per share for Q3 2019
  • $0.35 per share for Q4 2019
  • $0.39 per share quarterly in 2020

The expected annualized dividend yield for ORCC using the expected offering price of $15.30 to $16.30 per share:

  • 8.1% to 8.6% for Q3 2019
  • 8.6% to 9.2% for Q4 2019
  • 9.6% to 10.2% for 2020

It should be noted that newly offered shares will NOT be entitled to receive this distribution:

“On June 4, 2019, our Board declared a distribution of 100% of our net investment income for the quarter ended June 30, 2019 (excluding unrealized gains/losses), calculated in accordance with U.S. GAAP, for shareholders of record on June 14, 2019, payable on or before August 15, 2019.”

Preliminary Estimates of Results as of June 30, 2019

As of July 8, 2019, ORCC estimates that its net asset value (“NAV”) per share as of June 30, 2019 was between $15.27 per share and $15.30 per share.

The company estimates that its dividend was between $0.43 per share and $0.45 per share, calculated using 270,188,960 outstanding shares as of the record date of June 14, 2019. Subsequent to the record date, the Company issued 103,504,284 common shares in connection with its final capital drawdown of $1.58 billion which proceeds funded on June 17, 2019.

The company estimates its net investment income (“NII”) per share for the three months ended June 30, 2019 was between $0.41 per share and $0.43 per share, calculated using 284,750,732 weighted average shares for the three months ended June 30, 2019.

ORCC Management Fees

The management fee is 1.5% and excludes cash and after the offering, the advisor is entitled to pre-incentive fees NII of 17.5% with a hurdle rate of 6% annually as well as 17.5% of cumulative realized capital gains:

“The second component of the incentive fee, the capital gains incentive fee, payable at the end of each calendar year in arrears, equals 17.5% of cumulative realized capital gains from the date an Exchange Listing becomes effective (the “Listing Date”) to the end of each calendar year, less cumulative realized capital losses and unrealized capital depreciation from the Listing Date to the end of each calendar year, less the aggregate amount of any previously paid capital gains incentive fee for prior periods.”

ORCC Risk Profile

As of March 31, 2019, based on fair value, the portfolio consisted of 81.7% first lien senior secured debt investments, 16.5% second lien senior secured debt investments, 0.4% unsecured debt investments, 1.2% investment funds and vehicles, and 0.2% equity investments.

Credit quality seems fine with no investments on non-accrual status but 6.1% with “Investments Rating 3” which is a borrower “performing below expectations and indicates that the loan’s risk has increased somewhat since origination or acquisition”:

“As of March 31, 2019, 99.6% of our debt investments based on fair value in our portfolio were at floating rates. As of March 31, 2019 we had investments in 81 portfolio companies with an average investment size in each of our portfolio companies of approximately $84.3 million based on fair value. As of March 31, 2019, our portfolio was invested across 27 different industries. The largest industries in our portfolio as of March 31, 2019 were professional services and internet software and services, which represented, as a percentage of our portfolio, 9.8% and 9.4%, respectively, based on fair value.”

The portfolio has oil, energy and gas exposure of around 6.4%:

“As of March 31, 2019, our weighted average total yield of the portfolio at fair value and amortized cost was 9.4% and 9.4%, respectively, and our weighted average yield of debt and income producing securities at fair value and amortized cost was 9.4% and 9.4%, respectively. As of March 31, 2019, our portfolio companies, excluding the investment in Sebago Lake and certain investments that fall outside of our typical borrower profile, representing 98.8% of our total portfolio based on fair value, had weighted average annual revenue of $455 million and weighted average annual EBITDA of $80 million.”

Select ORCC Historical Financial Information

I will fully assess dividend coverage after the company reports June 30, 2019, results. Historically, its portfolio yield and NAV have been mostly stable:

Stock Repurchase Plan, Use of Leverage & Capital Structure

On July 7, 2019, the Board approved the Company 10b5-1 Plan, to acquire up to $150 million in stock at prices below NAV per share:

“We intend to put the Company 10b5-1 Plan in place because we believe that, in the current market conditions, if our common stock is trading below our then-current net asset value per share, it is in the best interest of our shareholders for us to reinvest in our portfolio. The Company 10b5-1 Plan is intended to allow us to repurchase our common stock at times when we otherwise might be prevented from doing so under insider trading laws. The Company 10b5-1 Plan will require Goldman Sachs & Co. LLC, as our agent, to repurchase shares of common stock on our behalf when the market price per share is below the most recently reported net asset value per share (including any updates, corrections or adjustments publicly announced by us to any previously announced net asset value per share). Under the Company 10b5-1 Plan, the agent will increase the volume of purchases made as the price of our common stock declines, subject to volume restrictions.”

As of March 31, 2019, ORCC had a debt-to-equity ratio of around 0.68 and neither the Board nor the shareholders are being asked to approve a reduced asset coverage ratio which means a maximum debt-to-equity ratio of 1.00. Also, before incurring any such additional leverage, the company would have to renegotiate or receive a waiver from the contractual leverage limitations under the existing credit facilities and notes:

“We currently have in place the Revolving Credit Facility, the SPV Asset Facility I, the SPV Asset Facility II, the SPV Asset Facility III and the CLO Transaction and in the future may enter into additional credit facilities. In addition, we have issued the 2023 Notes and the 2024 Notes. As of March 31, 2019, we had $2.8 billion of debt outstanding (which includes a subscription line revolving credit facility (the “Subscription Credit Facility”), which was paid down with proceeds from the capital call drawdown notice we delivered on June 4, 2019, and terminated on June 19, 2019 but does not include the 2024 Notes issued on April 10, 2019, or the CLO Transaction closed on May 28, 2019), with $290.7 million available under our existing credit facilities. As of March 31, 2019, our asset coverage ratio was 245%. Following the receipt of proceeds from the capital call drawdown notice we delivered on June 4, 2019 and from this offering and the repayment of indebtedness upon receipt of these proceeds, we expect our asset coverage ratio to be approximately 562% based on the value of our total assets as of June 27, 2019.”

To be a successful BDC investor:

  • As companies report results, closely monitor dividend coverage potential and portfolio credit quality.
  • Identify BDCs that fit your risk profile.
  • Establish appropriate price targets based on relative risk and returns (mostly from regular and potential special dividends).
  • Diversify your BDC portfolio with at least five companies. There are around 50 publicly traded BDCs; please be selective.

For updated ORCC target prices, dividend coverage and risk profile rankings, credit issues, earnings/dividend projections, quality of management, fee agreements, and my personal positions on all BDCs please see Premium Reports.

 

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