Blue Owl Capital Corporation

Good morning and welcome to Owl Rock Capital Corporation's first quarter 2020 earnings call. I would like to remind our listeners that remarks made during the call may contain forward-looking statements. Forward-looking statements are not guarantees of future performance or results and involve a number of risks and uncertainties that are outside the company's control. Actual results may differ. Materially from those in forward looking statements as a result of a number of factors, including those described from time to time in Owl Rock Corporation's filings with the Securities and Exchange Commission. The company assumes no obligation to update any forward looking statements. As a reminder, this call is being recorded for replay purposes. Yesterday, the company issued its earnings press release and posted an earnings presentation for the first quarter ended March 31st, 2020. This presentation should be reviewed in conjunction with the company's Form 10Q filed on May 5th with the SEC. The company will refer to the earnings presentation throughout the call today, so please have that presentation available to you. As a reminder, the earnings presentation is available on the company's website. I will now turn the call over to Craig Packer, Chief Executive Officer of Owl Rock Capital Corporation.

Thank you, Operator. Good morning, everyone, and thank you for joining us today for our first quarter earnings call. This is Craig Packer, and I am CEO of Owl Rock Capital Corporation and a co-founder of Owl Rock Capital Partners. Joining me today is Alan Kirschenbaum, our CFO and COO, and Dana Scafani, our Head of Investor Relations. Welcome to everyone who is joining us on the call today. We hope you and your families are safe and well during these unprecedented times. At Owl Rock, we've been incredibly focused on managing our portfolio while taking the necessary steps to ensure the safety of our team and maintaining full operational continuity. Our entire team has been working remotely for two months and we are proud and appreciative of their efforts to engage closely with our borrowers, partners, and service providers while always striving to be accessible to all of our stakeholders. Recognizing this environment is markedly different than anything any of us have ever seen, I will start today's call briefly discussing our investing activity and financial highlights for the first quarter, but then spend the bulk of our time and what we are seeing across our portfolio and our response to these challenging conditions. Then after Alan covers our financial results, I'll conclude by discussing our outlook and what may come next. Getting into the first quarter highlights, net investment income per share was 37 cents for the quarter, the same amount as the fourth quarter. We ended the quarter with net asset value per share of $14.09. down 7.5% versus the prior quarter, primarily reflecting the unrealized losses across the portfolio resulting from the significant spread widening we saw in the market at the end of the quarter. Looking forward for the second quarter, our board has declared a dividend of 31 cents per share, the same amount we have paid each quarter since our IPO, and which is in addition to the previously declared special dividend of 8 cents per share. Moving on to our investment activity, in the quarter we completed 731 million of new investment commitments, 616 million of new investment fundings, and 198 million of net funded investment activity, which was net of 418 million of sales In line with my comments on our fourth quarter call, this quarter we did see lower than average origination levels, which reflected lower levels of private equity deal activity. In addition, we saw an increase in prepayments. We added seven new portfolio companies this quarter with investments across four first lien facilities, three of which were Unitron facilities, two small second lien term loans for companies in the software space, and one modest-sized equity investment. The weighted average spread of the new investments was 610 basis points. We are pleased with the spreads we were able to achieve this quarter. We also increased our investment in 11 portfolio companies, largely reflecting add-on facilities used to support acquisitions. We had full paydowns on four portfolio companies. bringing the total portfolio at the end of the quarter to $8.9 billion across 101 borrowers. While this reflected a lower level of net activity than previous quarters, in light of the change in the market environment, this has proven to be a silver lining as it leaves us with that much more dry powder to weather the storm that has arrived and to take advantage of future opportunities. While we are pleased with our investment performance for the quarter, and we would be happy to discuss it further during the Q&A session. In light of the dramatic change in the environment due to the COVID-19 pandemic, we thought it would be most useful to share as much perspective as we could about how this environment impacts our business. To start, I want to offer some context. We believe we entered this unique period in a position of relative strength. Our portfolio consists primarily of first-lane term loans to upper-middle market businesses with an average EBITDA of $83 million. We try to assemble our portfolio in a defensive-minded manner by focusing on large, stable, recession-resistant businesses. We are well diversified across 27 industries with no industry representing more than 9% of the portfolio and our top 10 positions representing 24% of the total. Since inception, our portfolio performance has been very strong. and coming into this crisis, by and large, most of our companies were performing very well at or exceeding our expectations. We focused our portfolio on financial sponsor backed companies because we believe that sponsors can provide financial and operational support to their portfolio companies, which can help them weather challenges and preserve their long term value. On this note, one benefit of having a relatively younger platform is that roughly two-thirds of our sponsor-backed portfolio companies are owned in private equity funds with either permanent capital or relatively recent vintages, generally in funds that have closed in the last four years, and that these investments tend to benefit from the dry powder available in these funds, meaning that sponsors have both the motivation and the ability to continue to provide financial support to these portfolio companies. In addition to a well-performing portfolio, we also entered this period with a strong balance sheet. Alan will touch on this later in the call, but we believe we have one of the strongest balance sheets in the sector, which provides us with superior level of flexibility to navigate the challenges ahead. With all that said, I'd like to turn now to our response to the unique challenges posed by the COVID-19 pandemic. Given the sudden and dramatic change to the US economic outlook, Our focus across all of Owl Rock has been on protecting our portfolio and our balance sheet. With respect to our portfolio, we have taken a number of steps to enhance information flow and communication and to prepare for the needs of our companies so that we can protect our investments. In addition to our normal underwriting and portfolio management process, we have rolled out enhanced portfolio monitoring and management. Since the scope of the crisis became clear, We embark upon a re-underwriting of each name in our portfolio to assess the potential impact in the stay-at-home environment. We've been closely monitoring portfolio exposures to COVID with a new portfolio heat map focused on risks in both impacted sectors as well as impacts to individual names. We have spoken with each of our borrowers and their sponsors to understand what is happening on the ground at the portfolio companies and what may come next. and the strategic and operational steps being taken. These conversations are ongoing, happening weekly or even daily as updated information emerges. As our investment teams undertake this work, they share the latest updates with our leadership team in real time. In addition, we are holding weekly meetings to discuss portfolio company developments in greater detail with the full investment committee. This effort has been led by a portfolio management task force of our most senior underwriters, which was created to provide an enhanced level of support for each investment. This task force is led by our chief underwriting officer and our head of portfolio management. We also continue to add to our workout capabilities. In April, we brought on board a new head of workout who previously held this role at another direct lender. With more than 55 experienced investment and portfolio management professionals, many of whom have spent years in the direct lending space and have experience investing through a credit cycle, we believe we have all the necessary resources to manage the portfolio through this difficult period. We have asked several senior members of our team with significant workout experience to dedicate their time to portfolio management, including workouts, as they arise, and we plan additional hires in this area. We have a portfolio of companies which were quite healthy prior to the crisis. However, the nature of the economic shutdown has created pressure on many companies' needs for near-term liquidity, so we are focused on that for each of our borrowers. Given the uncertain outlook, we are running downside scenarios in which the economic impact is felt for a sustained period of time. I will touch in more detail on our current investment posture later in the call. But our focus right now has shifted to primarily preserving significant capital to support our borrowers should they need it so that we can protect the value of our investments. On that note, I'd like to touch on the revolver activity that we saw this quarter. In the first quarter, we net funded approximately 215 million under our hour of outstanding revolving credit facilities. resulting in approximately 60% of our total revolving credit facility commitments being drawn. Some of this was for normal course operational funding. However, some borrowers chose to draw down on their revolvers to shore up their liquidity. This was an orderly process and we have seen this activity level off. Alan will spend more time on this shortly, but I would highlight that we have multiples We are discussing with many of them what the support might look like and we expect they stand ready to provide it should their companies need it. Now I would like to discuss the current state of our portfolio. First, let me state the obvious. The U.S. economy is going through an unprecedented dislocation and it is simply not possible to tell how long this will last and what the impact will be. But we can give you a relative sense of what we see as the positives of our portfolio and areas of greater concern. I would point you to page 12 of our earnings presentation with our sector exposures for more detail. Since inception, we have focused on building a diversified and defensive investment portfolio. Our six largest sectors are software, professional services, insurance, healthcare providers, distribution, and food and beverage, which collectively comprise approximately 46% of our portfolio. Generally speaking, we think this is a solid core group of sectors that should hold up better than most in the current economic environment. Software has always been one of our largest industries. We believe our software investments will be amongst our strongest investments and the most resilient in the face of the economic environment. These products are used by their customers as part of daily operations, and these companies often have contractual revenue streams and high customer retention. as customers are unlikely to cancel their technology solutions as long as they remain in business. So while we believe these software companies may see a decline in revenue from a decreased customer base, overall, we think revenues of these businesses will be cushioned from declines in the economy. All of our distribution businesses have been classified as essential businesses and continue to operate, albeit at reduced levels, and our professional services businesses have largely transitioned to a work from home environment. Our insurance businesses, which address health and other risks, are often sold remotely and typically have a predictable recurring annual renewal process. In our healthcare businesses, while some names have seen a slowdown due to the temporary restrictions on non-essential medical procedures, the underlying business operations remain fundamentally sound. Further, many expect this will be one of the first areas to reopen and we expect these businesses will return to more normal operating levels. Many of our food and beverage businesses are actually benefiting from the increase in at-home food consumption. That's not to say there won't be any idiosyncratic impacts felt in these sectors, but we do think our companies in these sectors should hold up better than others. Now, let's turn to areas of greater focus. In aggregate, we have modest exposure to the sectors that have been most impacted. We have limited exposure to oil and gas as a sector which represents only 2% of our portfolio and within that sector we focus on companies providing midstream services with less impact from falling commodity prices. That said, I certainly want to be candid with you. We do have companies that are experiencing a direct impact from the economic shutdown. While we do not have direct exposure to the travel and hospitality sectors, We do have several names which serve the travel or hospitality end markets. In addition, some of our companies have ultimate end markets in the leisure and personal care space, which we are seeing which are seeing a direct impact from store closures. We have a couple of investments in the aerospace sector, which are materially impacted by the drop in aircraft production and commercial airlines travel. We have several smaller investments in quick service restaurants. which may still have doors open but are seeing a significant drop in same store sales. In addition to these focus sectors, we certainly expect a significant drop off in economic activity to broadly impact our portfolio. You can see these developments reflected in our internal credit ratings for the quarter. We downgraded investments representing 4.8% of the portfolio to a four rating on our internal rating scale. This is the first time since our inception that we have investments in this rating category, which we define as a loan where the risk has increased materially since origination. The portion of the portfolio that is three rated increased to 6.8% from 5.3% last quarter, bringing the total of three and four rated investments to approximately 12%. We ended the quarter with no names on non-accrual status. consistent with our results since inception. Through the end of March, each of our 101 portfolio companies were current on their contractually obligated interest payments. For two of our borrowers, we and the other lenders in those deals agreed that the interest payment could be made as PIC in order to enhance the company's liquidity. In addition, after quarter end, we have one company, National Dentex, that remains in an uncured covenant default. This company remains current on its interest and we are in discussions with the company and sponsor on next steps. Later in the call, I will make some further comments on how we are approaching the portfolio. But I would remind you the average loan-to-value of our investments is approximately 50%. This means, on average, our companies could lose 50% of their value and we would still not be impaired. While we don't want to minimize the magnitude of the challenges ahead as they are significant, We entered this period with a healthy portfolio of businesses, which we believe will come through the crisis retaining meaningful value. We are focused on working with the sponsors and ensuring our borrowers have the financial wherewithal to make it through these challenges so that we, as best we can, realize the full value of our investment in each case. Before I turn it over to Alan, I want to touch on two events that occurred following quarter end. The first was the expiration of the second tranche of our share lockup. As a reminder, 100% of our pre-IPO shareholders were subject to a lockup on approximately 375 million shares outstanding at the time of our IPO in July 2019. On April 14, the second tranche of 125 million shares became freely tradable, increasing our public float to 270 million shares. The final 125 million locked up shares will become freely tradable on July 20th. We also announced on April 1st that our board of directors unanimously approved a reduction of the company's minimum asset coverage ratio from 200% to 150%. Once effective, we plan to target a debt to equity range of 0.9 times to 1.25 times. which would allow us to operate with an increased cushion to the regulatory threshold. I want to underscore that this decision was not driven by any recent changes in the market or economic environment, but rather is a part of the natural evolution of ORCC's balance sheet over the past few years. This was primarily driven by our desire to have an increased regulatory cushion from our target leverage level, not to operate with significantly higher leverage over time. From the inception of ORCC, we have worked hard to build a strong reputation and track record with our stakeholders, including equity investors, lenders, bondholders, and rating agencies, and feel this was the right time to take this step. To that end, we are pleased that each of the rating agencies affirmed our investment grade rating and outlook following this announcement. The reduced asset coverage will enhance our ability to deliver attractive returns to shareholders while continuing to prudently manage risk and maintain a strong balance sheet. Now I'll turn it over to Alan to discuss our financial results in more detail.

Thank you, Craig. Good morning, everyone. First and foremost, we hope that you and your families are all safe and healthy.