Owl Rock(OBDC) - 2020 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION This section provides the unaudited consolidated financial statements and related disclosures for Owl Rock Capital Corporation Item 1. Consolidated Financial Statements This section presents the unaudited consolidated financial statements, including balance sheets, statements of operations, changes in net assets, cash flows, and detailed investment schedules Consolidated Statements of Assets and Liabilities As of June 30, 2020, total assets increased to $9.50 billion, total liabilities rose to $3.91 billion, and net assets decreased to $5.59 billion Consolidated Balance Sheet Summary (in thousands) | Metric | June 30, 2020 (Unaudited) | December 31, 2019 | | :--- | :--- | :--- | | Total Investments at Fair Value | $9,210,730 | $8,799,225 | | Total Assets | $9,497,126 | $9,203,619 | | Total Debt (net) | $3,494,872 | $3,038,232 | | Total Liabilities | $3,911,363 | $3,226,336 | | Total Net Assets | $5,585,763 | $5,977,283 | | Net Asset Value Per Share | $14.52 | $15.24 | Consolidated Statements of Operations For Q2 2020, total investment income was $190.2 million, leading to a net increase in net assets of $303.6 million, or $0.79 per share Consolidated Statements of Operations Summary (in thousands, except per share data) | Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Total Investment Income | $190,242 | $176,135 | $394,974 | $327,610 | | Net Operating Expenses | $61,748 | $56,734 | $118,149 | $110,530 | | Net Investment Income After Taxes | $129,162 | $119,622 | $275,418 | $215,628 | | Total Net Realized and Change in Unrealized Gain (Loss) | $174,457 | $5,048 | $(284,389) | $23,530 | | Net Increase (Decrease) in Net Assets | $303,619 | $124,670 | $(8,971) | $239,158 | | Earnings Per Share - Basic and Diluted | $0.79 | $0.44 | $(0.02) | $0.92 | - Management and incentive fees of $39.9 million for Q2 2020 and $82.4 million for H1 2020 were waived by the Adviser[11] Consolidated Schedules of Investments As of June 30, 2020, the total investment portfolio had a fair value of $9.21 billion, primarily composed of senior secured debt diversified across various industries Total Investments by Type (June 30, 2020) | Investment Type | Fair Value (in thousands) | % of Portfolio | | :--- | :--- | :--- | | First-lien senior secured debt | $7,394,315 | 80.3% | | Second-lien senior secured debt | $1,570,925 | 17.1% | | Unsecured debt | $9,207 | 0.1% | | Equity investments | $137,407 | 1.5% | | Investment funds and vehicles | $98,876 | 1.1% | | Total Investments | $9,210,730 | 100.0% | Top 5 Industry Concentrations by Fair Value (June 30, 2020) | Industry | % of Portfolio | | :--- | :--- | | Professional services | 13.2% | | Insurance | 14.9% | | Internet software and services | 14.9% | | Healthcare providers and services | 12.5% | | Distribution | 11.3% | - The company holds investments in two controlled/affiliated entities: Wingspire Capital Holdings LLC and Sebago Lake LLC, with a combined fair value of $158.7 million[33] Consolidated Statements of Changes in Net Assets For the six months ended June 30, 2020, net assets decreased by $391.5 million due to operating losses, shareholder distributions, and share repurchases Changes in Net Assets (in thousands) | Metric | H1 2020 | H1 2019 | | :--- | :--- | :--- | | Net Assets, beginning of period | $5,977,283 | $3,264,845 | | Net (Decrease) Increase from Operations | $(8,971) | $239,158 | | Distributions to Shareholders | $(302,462) | $(208,101) | | Net (Decrease) Increase from Capital Share Transactions | $(80,087) | $2,413,954 | | Total (Decrease) Increase in Net Assets | $(391,520) | $2,445,011 | | Net Assets, end of period | $5,585,763 | $5,709,856 | Consolidated Statements of Cash Flows For the six months ended June 30, 2020, net cash used in operating activities was $186.5 million, offset by $57.3 million provided by financing activities Cash Flow Summary for the Six Months Ended June 30 (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(186,455) | $(1,109,883) | | Net cash provided by financing activities | $57,281 | $1,230,125 | | Net (decrease) increase in cash and restricted cash | $(129,174) | $120,242 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, portfolio activity, and liquidity, highlighting COVID-19 impacts, portfolio composition, and capital structure COVID-19 Developments Management acknowledges the significant adverse impact of the COVID-19 pandemic on portfolio companies, leading to business disruptions and decreased origination activity - The company expects portfolio companies to be adversely impacted by COVID-19, potentially leading to financial distress, defaults, and a decrease in the value of investments[356] - The company has executed loan amendments to provide covenant modifications or additional liquidity, sometimes allowing for Payment-in-Kind (PIK) interest instead of cash[357] - Origination activity decreased during Q2 2020, reflecting lower levels of private equity deal activity during the period[358] Portfolio and Investment Activity As of June 30, 2020, the investment portfolio fair value was $9.2 billion, primarily in senior secured debt, with new investment commitments significantly decreasing in Q2 2020 Investment Activity for the Three Months Ended June 30 (at par, in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Total new investment commitments | $342,702 | $953,381 | | Total principal amount of investments funded | $308,011 | $772,888 | | Total principal amount of investments sold or repaid | $(165,519) | $(465,160) | - As of June 30, 2020, 98.7% of debt investments by fair value had floating rates, and the weighted average yield of accruing debt was 7.9%[369][392] - The portion of the portfolio rated 3 or 4 (indicating increased risk) grew to 13.0% of fair value as of June 30, 2020, up from 5.3% at year-end 2019, attributed to COVID-19 and underlying performance issues[404] - As of June 30, 2020, loans on non-accrual status represented 2.1% of the debt portfolio at amortized cost, compared to 0% at the end of 2019[405] Results of Operations Q2 2020 saw total investment income rise to $190.2 million, with a significant net unrealized gain of $174.5 million, partially reversing prior losses - The increase in Q2 2020 investment income was primarily due to a larger average portfolio size ($9.7 billion at par vs. $7.4 billion in Q2 2019), partially offset by a lower weighted average yield (7.5% vs. 9.1%)[427] - The net unrealized gain of $174.3 million in Q2 2020 was driven by improved market conditions and tightening credit spreads, with the fair value of debt investments rising to 95.1% of principal from 93.5% at the end of Q1 2020[436] - For the six months ended June 30, 2020, the company recorded a net unrealized loss of $284.8 million, primarily due to market conditions and credit spread widening related to COVID-19[437] Financial Condition, Liquidity and Capital Resources As of June 30, 2020, the company had $1.7 billion in available liquidity and $3.5 billion in total debt, with its asset coverage requirement reduced to 150% - As of June 30, 2020, the company had $1.7 billion of available capacity under its debt facilities[450] - Effective June 9, 2020, the company's minimum asset coverage ratio was reduced from 200% to 150%, allowing for higher leverage, with the actual ratio at 247% as of June 30, 2020[448][449] - The company's $150 million stock repurchase plan was fully utilized, with 12,515,624 shares repurchased as of June 30, 2020, and the plan exhausted on August 4, 2020[316][468] Debt Obligations as of June 30, 2020 (in thousands) | Facility Type | Committed | Outstanding Principal | Net Carrying Value | | :--- | :--- | :--- | :--- | | Revolving Credit Facility | $1,335,000 | $164,571 | $157,952 | | SPV Asset Facilities | $1,300,000 | $715,250 | $704,301 | | CLOs | $1,162,000 | $1,162,000 | $1,149,961 | | Unsecured Notes | $1,475,000 | $1,475,000 | $1,502,658 | | Total Debt | $5,272,000 | $3,516,821 | $3,494,872 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces significant valuation and interest rate risks, exacerbated by COVID-19, with a hypothetical 100 basis point interest rate increase estimated to boost net income by $14.2 million annually - The company's primary market risks are valuation risk for its illiquid private investments and interest rate risk due to its floating-rate assets and liabilities[592][593][594] Annualized Impact on Net Income of Hypothetical Base Rate Changes (in millions) | Change in Basis Points | Impact on Net Income | | :--- | :--- | | Up 300 | $145.4 | | Up 200 | $79.0 | | Up 100 | $14.2 | | Up 50 | $(4.4) | | Down 25 | $2.3 | - As of June 30, 2020, 98.7% of the company's debt investments by fair value were at floating rates, with a weighted average LIBOR floor of 0.85%[595] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal controls - The company's disclosure controls and procedures were deemed effective as of the end of the quarter[598] - No material changes were made to internal controls over financial reporting during the quarter ended June 30, 2020[599] PART II OTHER INFORMATION This section covers legal proceedings, risk factors, and unregistered sales of equity securities Item 1. Legal Proceedings The company is not currently subject to any material legal proceedings, nor is it aware of any material threatened legal proceedings - As of the filing date, the company reports no material pending or threatened legal proceedings[602] Item 1A. Risk Factors This section highlights significant risks, emphasizing the adverse impacts of the COVID-19 pandemic, LIBOR transition, and increased leverage from reduced asset coverage - The COVID-19 pandemic has created significant economic uncertainty, adversely impacting portfolio companies through business disruptions, which could lead to increased defaults and write-downs[606][608] - Capital market volatility caused by the pandemic has negatively affected debt and equity markets, which could impact the company's ability to raise capital, the valuation of its investments, and the pace of investment activity[615][617] - The company faces risks from the planned cessation of LIBOR after 2021, which will require renegotiating credit agreements with portfolio companies and its own credit facilities, potentially impacting interest income and borrowing costs[629][630] - Following shareholder approval, the company's asset coverage requirement was reduced from 200% to 150% effective June 9, 2020, which allows for increased leverage and magnifies the potential for gain or loss[633] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds On May 15, 2020, the company issued approximately 2.25 million shares of common stock through its dividend reinvestment plan, which was not registered under the Securities Act of 1933 - The company issued approximately 2.25 million shares of common stock on May 15, 2020, pursuant to its dividend reinvestment plan[646]