Blue Owl Capital Corporation (NYSE:OBDC) Q3 2025 Earnings Call November 06, 2025 10:00 AM ET Speaker2Good morning, everyone, and welcome to Blue Owl Capital Corporation's third quarter 2025 earnings call. As a reminder, this call is being recorded. At this time, I'd like to turn the call over to Mike Mastuccio, Head of BDC Investor Relations.Speaker6Thank you, Operator, and welcome to Blue Owl Capital Corporation's third quarter 2025 earnings conference call. Yesterday, Blue Owl Capital Corporation issued i ...

The recent default of automotive parts supplier First Brands Group following its downgrade from ‘B+’ does not signal increased risk for the traditional direct lending market, according to Fitch Ratings. The agency said First Brands’ debt exposure was primarily tied to broadly syndicated loans (BSL), rather than direct lending. Fitch noted that “the BSL market has significantly greater exposure” to the company’s restructuring, though it described the overall impact on collateralised loan obligations (CLOs) ...

Private Credit Billionaire Lawrence Golub: Why Direct Lending Is Not In A Bubble https://t.co/0KN7w70c2w ...

Direct Lending Market - CVC's credit unit has raised €10.4 billion for European direct lending [1]

Core Insights - Bennelong Funds Management has signed a memorandum of understanding (MOU) with Monroe Capital to expand its distribution in Australia and New Zealand [1] - Monroe Capital is a USD$21.6 billion asset manager specializing in diversified private credit solutions [1] - The firm focuses on US lower middle market direct lending to institutional and high-net-worth investors [1]

Federal Reserve Policy & Interest Rates - The market has fully priced in a 100% probability of the Federal Reserve cutting rates by 25 basis points at each of the next three meetings this year, totaling a 75 basis points reduction [2] - The market may be slightly disappointed if the Fed does not cut by 50 basis points [2] - The Fed is implicitly accepting a 3% inflation rate, despite aiming for 2%, and is prioritizing jobs data, which is currently weak, as the reason for cutting rates [3] - The expectation is that the Fed funds rate will eventually be brought down to 3% with cuts in every successive meeting [4] Economic Outlook - There is very little to no risk of recession or stagflation, with a 3% GDP print expected for the current quarter, following a 33% print last quarter [3][4] - Equity markets and credit spreads, currently at 300 in the high yield market, indicate growth and negate the possibility of recession or stagflation [5] - A significant stimulus package, along with productivity gains from AI, is expected to further boost the economy [6] - One trillion is expected to be spent in data centers [7] Credit Market Opportunities - Public market spreads have tightened, and rates have come down, but new issuance provides opportunities to gain alpha [8] - Direct lending is experiencing its most prolific period, with seven deals approved through the investment committee in the last week [9] - Lower interest rates are expected to spur more transactions, refinancings, and new issue activity for private equity [10] - Asset-based lending, particularly in financing property, plant, and equipment in the AI sector, offers attractive risk-adjusted returns with 60% LTVs and potential returns in the low to mid-teens [12][13] - Private credit offers a 500 basis point incremental spread pickup compared to public credit [13]

Interest Rate Environment & Economic Outlook - The company believes higher interest rates are likely to persist for an extended period [3][6] - The company's portfolio companies are experiencing double-digit growth, indicating a sound and solid economy [5] - The company expresses confidence in the Fed's ability to navigate the rate environment [6] - The company views current market volatility and concerns about Fed independence as "noise," emphasizing the underlying strength of the economy [7][8][12] Private Markets & Retirement Plans - The company acknowledges a generational shift towards increased accessibility of private investments, including potential inclusion in 401(k) plans [2][13][14] - The company advocates for a cautious approach to expanding private investment access, emphasizing the importance of walking before running [14] - The company highlights the historical outperformance of private lending compared to liquid alternatives [16] - The company stresses the need for robust disclosure and regulation in private markets to mitigate risks such as fraud [17] - The company cautions against a potential flood of retail capital into private equity, which could create opportunities for existing firms to exit less desirable investments at the expense of retail investors [22][23] - The company suggests starting with lower volatility, safer private investment options like private credit and real assets, emphasizing a prudent and well-regulated approach [23][24]

Financial Data and Key Metrics Changes - The company achieved a return on equity (ROE) of 10.6%, marking the twelfth consecutive quarter of double-digit ROE, based on adjusted net investment income (NII) per share of $0.40, reflecting strong earnings power [5][21] - The net asset value (NAV) per share was $15.03, down $0.11 from the prior quarter [6][21] - Adjusted NII per share increased by $0.01 compared to the prior quarter, driven by elevated one-time repayment income totaling $0.05 per share [21][22] - The company declared a supplemental dividend of $0.02 and a base dividend of $0.37 for the third quarter [22] Business Line Data and Key Metrics Changes - Approximately $1.1 billion of new investment commitments were deployed in the second quarter, with $906 million of fundings [12] - The debt portfolio maintained a conservative loan-to-value (LTV) ratio of 42% on average, supporting robust recoveries [16] - Revenue and EBITDA for portfolio borrowers increased by mid to high single digits year-over-year, with interest coverage rising to 1.9 times [17] Market Data and Key Metrics Changes - The deal environment in 2025 has been challenging, with muted M&A activity impacting overall deal flow [8] - The company noted a stabilization in spread pressure experienced last year, with direct lending spreads remaining tight but commanding a healthy premium over the broadly syndicated loan market [26][60] Company Strategy and Development Direction - The company is expanding into complementary strategies, including alternative credit and digital infrastructure, to access new investment opportunities [10][26] - A cross-platform equipment leasing joint venture was formed to enhance diversification and expand reach in new investment areas [10][15] - The company aims to maintain strong risk-adjusted returns regardless of economic conditions, supported by a defensively constructed portfolio and disciplined underwriting [11][26] Management's Comments on Operating Environment and Future Outlook - Management expressed cautious optimism about a potential rebound in deal activity in the second half of the year, citing increased engagement with private equity sponsors [28][45] - The company does not foresee significant stress in its portfolio, with a stable watch list and no material increase in amendment activity [18][66] - Management believes that the current economic environment is resilient, with portfolio companies continuing to perform well despite broader economic concerns [66] Other Important Information - The company ended the quarter with over $4 billion in total cash and capacity on its facilities, providing significant liquidity to invest in new opportunities [24] - The non-accrual rate was reported at 0.7% at fair value and 1.6% at cost, reflecting a slight increase due to one small position on the watch list [18] Q&A Session Summary Question: Where are we in terms of realizing synergies from the merger with OBD? - Management indicated that operational expense synergies have been realized, while financing synergies are expected to materialize over the next year [32][34] Question: Can you quantify how much of year-to-date originations have come from new business lines? - Management noted that the platform has expanded into new lines of business, but the impact on originations is still modest as they are just beginning to see deal flow [36][38] Question: What types of deals are being seen in the current environment? - Management highlighted a mix of public-to-private activity, refinancing, and add-on acquisition financing as potential deal types [44][46] Question: How does the company view leverage going forward? - Management stated that they are comfortable with current leverage levels and expect to maintain them unless deal activity picks up significantly [48] Question: What is the outlook for spreads in the current market? - Management believes spreads have troughed and may widen in the future, depending on market conditions [68] Question: How does the company plan to scale the equipment leasing business? - Management emphasized that while the equipment finance joint venture may not be a massive investment, it represents a diversification strategy that can create consistent returns [75][76]

Financial Data and Key Metrics Changes - The adjusted net investment income decreased to $32.5 million or $0.37 per share, down from $38.7 million or $0.45 per share in the prior quarter, primarily due to nonrecurring and noncash items related to refinancing activities [25][27] - The net leverage ratio at quarter end was 0.93 times, flat from last quarter, with total debt outstanding at $1.46 billion [28] - The weighted average interest rate decreased slightly to 6.6% from 6.7% at the end of the prior quarter [28] Business Line Data and Key Metrics Changes - The weighted average yield on new debt investments was 9.1%, compared to 9.5% in the prior quarter, reflecting continued tight spreads in the marketplace [13] - The median EBITDA of portfolio companies was approximately $161 million, a $3 million increase from the prior quarter [17] - The weighted average leverage in the portfolio decreased slightly from 5.2 to 5.1 times, while the weighted average interest coverage increased from 2.1 to 2.2 [17] Market Data and Key Metrics Changes - M&A activity remained muted due to uncertainty surrounding increased tariffs, leading to a pivot towards refinancing existing debt rather than new buyouts [8] - Credit spreads tightened, with pricing for large cap sponsor loans in the SOFR plus 425 to 475 basis points range [9] - The company is observing increased opportunities in Europe, supported by a strengthening economic outlook and favorable valuation metrics [11] Company Strategy and Development Direction - The company is focused on high-quality companies with strong credit profiles and is selectively deploying capital into mature market-leading businesses [15][16] - Oaktree's global platform provides a competitive advantage, allowing access to high-quality transactions often unavailable to smaller lenders [16] - The company aims to maintain a diversified portfolio while avoiding industry concentration risk and steering clear of more cyclical businesses [16] Management's Comments on Operating Environment and Future Outlook - Management noted that the long-term outlook for direct lending remains favorable, with compelling yields on a gross unlevered basis [12] - The company is actively engaged with management teams of challenged positions to drive favorable resolutions [21] - There is confidence in the ability to deploy capital effectively, supported by a robust pipeline of investment opportunities [41] Other Important Information - The company successfully amended and extended the maturity of its senior secured revolving facility, reducing the interest rate, which will reduce overall interest expense [6] - The company has ample liquidity of approximately $730 million, including $80 million in cash and $650 million of undrawn capacity on credit facilities [28] Q&A Session Summary Question: How were spreads generated this quarter? - The company achieved first lien spreads in the mid-500s, influenced by a mix of lower spread deals and higher yielding deals, including life science transactions [34][36] Question: What is the plan regarding leverage and discussions with rating agencies? - The plan is to maintain leverage at the midpoint of the range (0.9 to 1.25) and to engage actively with rating agencies regarding potential increases in leverage to support earnings [40][41] Question: Confidence in the base dividend level of $0.40 per share? - The base dividend was set at $0.40 based on visibility into prepayment activity and the progress made in converting non-interest earning assets into interest-earning assets [54] Question: What types of asset-backed opportunities is the company considering? - The company is looking at a diversified pipeline of asset-backed deals, including rental car leases and small loans for HVAC systems, while avoiding consumer unsecured debt [56][59]

Industry Trend - Direct lending has steadily declined [1] Work-Life Balance - Bankers' tee time has slipped due to changes in direct lending [1]