The following information was previously provided to subscribers of Premium BDC Reports along with:
ORCC target prices/buying points
ORCC risk profile, potential credit issues, and overall rankings. Please see BDC Risk Profiles for additional details.
ORCC dividend coverage projections (base, best, worst-case scenarios). Please see BDC Dividend Coverage Levels for additional details.
This update discusses Owl Rock Capital Corporation (ORCC) remains one of the best-priced BDCs especially for lower-risk investors that do not mind lower yields. ORCC is for risk-averse investors as the portfolio is mostly larger middle market companies that would likely outperform in an extended recession environment.
“We also continue to grow the size of the companies in our portfolio. The weighted average EBITDA of our borrowers is now $114 million, which is up from $95 million a year ago. In addition to allowing us to invest more efficiently, we believe larger companies are safer to lend to, and that has been borne out by our results over the last five years. This year, we have already evaluated more than 20 opportunities over $1 billion in size, and invested in or committed to eight of these, and continue to evaluate others. This trend continues to accelerate and is creating exciting opportunities for large direct lenders like Owl Rock.”
As predicted in previous reports, ORCC’s dividend coverage continues to improve mostly due to:
Increased dividend income from its ORCCSenior Loan Fund and Wingspire
Maintaining target leverage with new investments offsetting repayments
Additional prepayment fees and accelerated OID
Continued lower cost of borrowings
ORCC is the third-largest publicly traded BDC (much larger than MAIN, PSEC, GBDC, GSBD, NMFC, BXSL, HTGC, and AINV) with investments in 130 portfolio companies valued at around $12 billion that are mostly first-lien secured debt positions. ORCC is one of the few BDCs rated by all of the major credit agencies.
ORCC Dividend Coverage Update
ORCC’s longer-term (“LT”) target price takes into account improved dividend coverage over the coming quarters mostly due to:
Increased dividend income from its Senior Loan Fund and Wingspire
Maintaining target leverage with new investments offsetting repayments
Additional prepayment fees and accelerated OID
Higher portfolio yield from rotating into higher yield assets
Continued lower cost of borrowings
ORCC continues to increase leverage and is now near the midpoint of its target debt-to-ratio between 0.90 and 1.25 (currently 1.06 excluding $780 million of available cash) giving the company plenty of growth capital.
“We experienced a record level of originations this quarter which resulted in a fully ramped $12 billion-plus portfolio. We also had a record level of repayments. Prior to this quarter we had not yet seen the pace of repayments expected for a portfolio of our size but this trend finally materialized in the third quarter. We had more than $2 billion of repayments, which generated healthy fee and amortization income. At the same time, we’re able to seamlessly replace those repaid investments with equally attractive new investments of a similar credit quality and comparable economics, which has allowed us to finish the quarter in an equally strong position and with leverage comfortably in our target range. While this quarter may prove to be on the higher end, we do expect repayments to continue to exceed the levels we have seen in the last couple of years.”
“As a result of this activity our net leverage increased to 1.06 times roughly the midpoint of our target ranges of 0.90 to 1.25 times. I would expect that we would operate somewhere between there and 1.10 in sort of center of gravity.”
For Q3 2021, ORCC beat its best-case projected earnings due to higher-than-expected prepayment-related, dividend, and fee income as well as higher portfolio growth growing total income to the highest level of $269 million.
“We had been expecting to achieve full coverage of our $0.31 per share dividend sometime in the second half of 2021. With these strong results we have now achieved this milestone and are well-positioned to continue to fully earn our dividend going forward.”
Management is expecting another strong quarter partially due to higher prepayment-related income which has been taken into account with the updated financial projections and was discussed on the recent earnings call:
“We had a significant amount of repayments this quarter, which drove a material increase in earnings from accelerated accretion and prepayment fees. While this is not a contractual earnings stream, we do expect repayment-related income to broadly stay around these levels in future quarters, as we expect that our repayments will remain at a more normalized pace, recognizing that the timing of repayments is idiosyncratic in any specific quarter.”
“We expect to see a healthy level, likely lower than this quarter’s record, but higher than previous quarters. Now that the portfolio is fully ramped, we will generally be targeting originations in line with repayments in order to maintain a fully levered, fully invested portfolio, and we have a strong backlog of attractive deals expected to close this quarter.”
The increased dividend income was mostly related to equity investments in Windows Entities and Wingspire Capital Holdings that will likely continue over the coming quarters:
“Our total investment income for the quarter, increased to $269 million, up $20 million from the prior quarter. This increase was primarily driven by dividend income, which increased by $8 million. We received our first dividend from Wingspire this quarter, as well as continued dividend income from Windows Entities and our senior loan fund. We expect dividend income from Wingspire and our senior loan fund to continue to increase as our committed capital is deployed.”
“Our investment in Wingspire, an asset-based lender to US-based middle market companies, with roughly $350 million of assets and very strong credit performance. We currently have approximately $195 million invested in Wingspire and see opportunities to invest more capital going forward. We expect Wingspire will be run rating at a high single-digit ROE by the end of this year and can generate a 10-plus percent ROE.”
Also taken into account with the updated projections is additional dividend income from its ORCC Senior Loan Fund (previously Sebago Lake LLC) which now accounts for 1.9% of the total portfolio. Management is expecting this joint venture with Nationwide Life Insurance to eventually provide quarterly dividend income of $7 million:
“The other investment is in our Senior Loan Fund. As you recall, last quarter, we increased our equity commitment in the fund to $325 million and our economic ownership to 87.5%. The fund has already generated an attractive average quarterly ROE over the past three years of approximately 10%, and we will look to increase our capital invested over time.”
From previous call: “And so we’ll just be able to increase over time the amount of money ORCC has working and grow that number, when we get all that working it’s going to take some time should be we $7 million a quarter, which is I think terrific.”
On November 23, 2021, ORCC announced the prepayment of its higher rate of 4.75% notes due 2023. In August 2021, the company issued another $400 million of its 2.875% notes due 2028. As of September 30, 2021, ORCC had around $2.4 billion of liquidity consisting of $780 million of cash and almost $1.6 billion of undrawn debt capacity (including upsizes).
Similar to other BDCs, ORCC has been improving or at least maintaining its net interest margin which is the difference between the yield on investments in the portfolio and the rate of borrowings. During the most recently reported quarter, ORCC’s portfolio yield declined slightly but will likely trend higher over the coming quarters as the company rotates into higher yield assets “without sacrificing credit quality”:
“We continue to see an opportunity to improve our portfolio mix. We still have just over $1 billion of debt investments in the portfolio with a spread lower than 550 basis points. Our portfolio spread will benefit as these investments are repaid and we seek to redeploy this capital into higher spread investments, typically unitranches, which is an area where we have been able to achieve attractive pricing. There’s a portion of that $1 billion that I think there’s a reasonable chance we’ll get repaid in the next one to two quarters. And then there’s a portion that I think will take longer than that. There’s a portion in there that we might choose to sell over time and then there’s others that probably aren’t easily sold because there’s not other lenders in the credit with us, not from a credit reason.”
ORCC’s average borrowing rate has declined from 4.6% to 2.9% over the last 7 quarters due to continued issuances of notes and CLOs at lower rates.
For Q3 2021, ORCC beat its best-case projected earnings due to higher-than-expected prepayment-related, dividend, and fee income as well as higher portfolio growth growing total income to the highest level of $269 million.
“primarily due to an increase in our investment portfolio. Included in interest income is dividend income, which increased period over period, and other fees such as prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns.”
ORCC was not expected to cover its quarterly dividend but Core NII of $0.337 (excluding excise tax) covered 109% of its dividend of $0.310.
The Board declared a Q4 2021 dividend of $0.31 per share for stockholders of record as of December 31, 2021, payable on or before January 31, 2022.
“We are very pleased to report strong results this quarter. We experienced a record level of both originations and repayments and were able to seamlessly redeploy capital from those repaid investments into equally attractive new investments. We are very proud of where our portfolio stands today and to achieve the important milestone of earning our dividend from net investment income this quarter with continued strong credit.”
ORCC Quick Risk Profile Update
Two of its smaller first-lien loans to QC Supply were added to non-accrual status during Q2 2021 and marked down again during Q3 2021. Also, CIBT Global, Inc. remains on non-accrual and was also marked down as shown in the following table. Please keep in mind that ORCC has 130 portfolio companies so there will always be a certain amount on non-accrual which currently account for 0.4% of the total portfolio fair.
“We are carefully monitoring the current headwinds caused by the labor shortages and supply chain disruptions. To date, we have not seen a material impact as many of our companies are services businesses, which have modest exposure to the manufacturing economy. For example, some of our largest sectors are software, insurance, and health care, which are not as exposed to the current economic headwinds. In line with last quarter, our nonaccruals remained low with only two investments on non-accrual status, representing 0.4% of the portfolio based on fair value. One of the lowest levels in the BDC sector and our annualized loss ratio is 14 basis points.”
ORCC’s portfolio is mostly larger middle market companies that would likely outperform in an extended recessionary environment.
“We also continue to grow the size of the companies in our portfolio. The weighted average EBITDA of our borrowers is now $114 million, which is up from $95 million a year ago. In addition to allowing us to invest more efficiently, we believe larger companies are safer to lend to, and that has been borne out by our results over the last five years.”
“We generally favor bigger companies for our portfolio. This year, we have already evaluated more than 20 opportunities over $1 billion in size, and invested in or committed to eight of these and continue to evaluate others. This trend continues to accelerate and is creating exciting opportunities for large direct lenders like Owl Rock. We believe we are especially well-positioned for this due to our scale platform with a full suite of financing solutions, large, deeply experienced team with strong relationships in the financial sponsor community.”
Investments Rating 3 or 4 which are borrowers performing “below” or “materially below” expectations indicating that the loan’s risk had increased “somewhat” or “materially” continue to decline and are now only 9.0% of the portfolio.
The portfolio is highly diversified with the top 10 positions accounting for around 20% of the portfolio with low cyclical exposure including retail, oil, energy, and gas.
During Q3 2021, its net asset value (“NAV”) per share increased by 0.4% due to overearning the dividend and unrealized portfolio appreciation including its equity position in Windows Entities. Please note that ORCC is for lower-risk investors with less equity participation in portfolio companies which typically drives NAV per share volatility for certain BDCs.
“Net asset value per share increased to $14.95, up $0.05 from last quarter. This increase was primarily driven by the growth in our net investment income, which exceeded our dividend by $10 million, as well as from $12 million of unrealized gains.”
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Friday Comparison or Baby Bond Reports – A series of updates comparing expense/return ratios, leverage, Baby Bonds, portfolio mix, with discussions of impacts to dividend coverage and risk.
This information was previously made available to subscribers of Premium BDC Reports. BDCs trade within a wide range of multiples driving higher and lower yields mostly related to portfolio credit quality and dividend coverage potential (not necessarily historical coverage). This means investors need to do their due diligence before buying including setting target prices using the portfolio detail shown in this article (at a minimum) as well as financial dividend coverage projections over the next three quarters as discussed earlier.
