Blue Owl Capital Corporation

Good morning and welcome to the Owl Rock Capital Corporation's Second Corner 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 Capital 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 second quarter ended June 30, 2020. This presentation should be reviewed in conjunction with the company's Form 10-Q filed on August 4 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 second 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 Kirshenbaum, 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. I'll start today's call by briefly discussing our financial highlights for the second quarter before providing an update on what we are seeing across our portfolio in this challenging economic environment. Then, after Alan covers our financial results, I'll conclude by discussing our outlook and current market conditions. Getting into the second quarter financial highlights, net investment income per share was $0.34. We ended the quarter with net asset value per share of $14.52, which is an increase of 3% versus the prior quarter, primarily reflecting a reversal of a portion of the unrealized losses we took last quarter as we have seen credit spreads tighten meaningfully from the end of the first quarter. This NAV is in line with the estimated range that we pre-released on July 13th. Looking forward for the third 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. We have two additional remaining $0.08 per share special dividends, which have been previously declared for the third and fourth quarter of this year. Regarding our balance sheet, we remain very well capitalized, with over $2 billion in liquidity today. That said, we continue to be cautious on capital deployment in this environment, and so we continue to maintain one of the lowest leverage profiles in the space, with leverage ending at 0.6 this quarter. In June, we received shareholder approval to decrease our asset coverage requirement to 150%, which will allow us to achieve our revised leverage target of 0.9 to 1.25 debt to equity and operate with meaningfully more cushion to our regulatory cap. Lastly, the third and final lockup of our stock came off on July 20th. At this point, 100% of our pre-IPO shares are freely tradable. Although we don't feel the current stock price reflects the true value of the portfolio we have created, we are pleased to have moved through the lockup period with limited disruption to our stock price, which we believe continues to highlight the long-term orientation of our shareholder base. Now I'd like to provide an update on our portfolio. While the effects of the economic shutdown related to the COVID-19 pandemic were just beginning to be felt at the end of the first quarter, The second quarter reflects a full quarter's impact. As such, our top priority has remained protecting the value of our existing investments. I spent significant time on our first quarter call detailing our enhanced portfolio management process, and we have been very pleased with the outcome of this approach. Information flow with our borrowers remains strong, and we continue to receive frequent updates from our companies. Overall, we feel very good about the quality of our portfolio and its performance despite the economic challenges. I'd like to remind everyone why we believe our portfolio is well positioned to weather these uncertain times. We ended the second quarter with $9.2 billion of investments at fair value across 102 borrowers with an average investment size of less than 1% of the total portfolio. Our investments consist primarily of first lien term loans to upper middle market businesses with an average EBITDA of $93 million. Since inception, we've aimed 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. We lend primarily to private equity-backed companies which we find attractive because private equity firms can support their companies with financial and operational resources. In line with last quarter, our six largest sectors are software, insurance, professional services, healthcare providers, distribution and food and beverage. which collectively comprise approximately half of our portfolio. We continue to believe this is a solid core group of sectors that continues to perform well even in the current economic environment as many of these businesses provide essential or non-discretionary services. To date, our borrowers in these segments have demonstrated resilience and by and large continue to perform well. Looking beyond our six largest sectors, the vast majority of our borrowers continue to have reasonable performance even in this highly unusual environment. Although it's still early in the economic disruption, what we have seen so far we believe validates how we have positioned our portfolio. As expected, this quarter we saw an increase in discussions with our borrowers and their private equity owners about covenant levels and liquidity needs. To date, these discussions have been very constructive and, in a number of cases, have already led to concrete actions which improve our borrowers' balance sheets. We have needed to negotiate amendments in a relatively modest number of credits in the context of the size of our portfolio. We executed eight significant amendments during the quarter in which we provided covenant modifications or liquidity runway. Sometimes by allowing a borrower to pay a portion of interest in kind rather than in cash for a period of time. In exchange, the borrower's financial sponsors put in additional equity in almost all of these situations. In most of these, we also received enhanced economics such as increased spread, fees, or call protection. We amended roughly $500 million of investments this quarter where we received additional economics which added on average an additional 120 basis points of spread on those investments. We are pleased with the strength and capacity of our portfolio management and workout resources, which have allowed us to work through these complex situations. Overall, we did not see a material change in our internal credit ratings metrics this quarter. The percentage of our portfolio, which is a three or four on our internal rating system, is 13% for the second quarter, up only slightly from 12% in the first quarter. We also saw some names continue to outperform our expectations and were upgraded to our highest rating category. 9% of the portfolio is now rated as a one versus 7% in the first quarter. Names in our two-rated category, names which are performing in line with our expectations, continue to account for over 75% of the portfolio. Further, we continue to have no names in the lowest rated five category, and we continue to have no loss of original principal on any investment since inception. Another measure of our portfolio health is that less than $950 million, or 10% of the portfolio, is marked below 90 cents on the dollar today. Further, only one debt investment is marked below 80. Our most COVID impacted borrowers, which make up a majority of our three and four rated investments, operate across several different industries. However, for the most part, they have ultimate end market exposure to either of two broad segments, discretionary consumer spending or the travel and hospitality space. The discretionary consumer spending end market primarily includes businesses with physical locations, which were impacted by temporary store closures and stay-at-home orders. Many have seen some pickup in activity as the economy reopens, although it's still early. The travel and hospitality sectors face a longer road back to historical levels. The companies most impacted here include the ones in our aerospace and defense sector, as well as businesses whose end market is driven by travel. As of quarter end, each of our 102 portfolio companies were current on their interest. PIC interest represents less than 5% of total investment income for the year-to-date period. We have one situation where we have agreed with the borrower to delay the interest payment past quarter end, while we, the borrower, and the sponsor are working on a broader amendment package. As previously disclosed, at the end of the second quarter, we placed two names on non-accrual status. Geodym Corporation, also known as National Dentex, and CIBT Global. The aggregate exposure of these names is approximately $165 million, or less than 2% of the total fair value of the portfolio. We are working closely with both companies and their financial sponsors to help the companies through these difficult times, as well as maximize the value of our investments. This is the first time since inception that we've had names on non-accrual, However, we have certainly always understood that there would be challenges over time with a hopefully small number of names in our portfolio. We believe that the focus of our portfolio management and workout experts will allow us to navigate these challenges in a proactive and holistic manner. Turning briefly to our origination activity, during the second quarter, new investment fundings were $308 million and net funded investment activity was $142 million. which was net of $166 million of sales and repayments. As we anticipated coming into this quarter, our originations were more modest as activity in the market slowed, and we remained cautious given the macroeconomic environment. That said, we were pleased to add three new borrowers to our portfolio. As you'll see in our earnings presentation, the weighted average spread of the new investments this quarter was 7.4%. roughly 100 basis points higher than our current portfolio spread. I'd like to spend a moment highlighting one of these deals. We provided a $300 million Unitronch loan to Checkmarks in what was one of the few transactions to take place during the height of the pandemic. Our financial flexibility and ability to provide certainty enabled us to support the buyout of this leading software security provider by Hellman and Friedman in a $1.2 billion transaction. The acquisition will bolster Checkmarx's already outstanding growth at a time when software security has never been more critical for modern enterprises building out their software solutions. I'll also highlight one of the names that was repaid at this quarter. Give and Go is a leading provider of frozen baked goods. We don't disclose ratings on individual names in the portfolio, but I can say that at one point during the course of our investment, This name was three rated on our internal rating scale. The company was sold to a strategic buyer in early April, and our loan was fully repaid. This example is evidence for our thesis that larger companies, even if they encounter challenges, should prove to be more durable and to benefit from increased strategic value and exit opportunities. 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, as Craig noted, we hope that you and your families are all safe and healthy. We thank you for your continued partnership and support. Outstanding debt of $3.5 billion and total net assets of $5.6 billion. Our net asset value per share increased to $14.52 as of June 30th compared to $14.09 as of March 31st, an average increase of approximately 3.1%. Our dividend for the first quarter was $0.31 per share plus an $0.08 per share special dividend. And our net investment income was $0.34 per share. All of that was for our second quarter. On the next slide, slide 8, you can see total investment income for the second quarter was $190 million, down from $205 million last quarter. I'll talk about this a bit more in a moment. Net expenses for the second quarter were $61.7 million, up from $56.4 million last quarter. This increase was driven by two items related to interest expense in the second quarter. The first item was a non-cash acceleration of upfront costs related to the full paydown of SPV Asset Facility 1, which contributed $2.5 million in one-time interest expense this quarter. The second item was our average debt during the second quarter was higher than during the first quarter, hence increasing interest expense in the second quarter. All of this led to Net Investment Income, or NII, for the second quarter of $129 million Down from $146 million last quarter. Also, as a result of the fair value of our portfolio increasing from 93.5% to 95.1%, we had $175 million of net unrealized gains during the second quarter. Our other operating expense ratio continues to be among the lowest in the industry at 24 basis points on a trailing 12-month basis. And we have 11 cents per share in undistributed distributions as of June 30th. To drill into our investment income and interest expense results a little more, I think it's helpful if we talk about our asset liability rate sensitivities for a moment. As you can see on slide 13, our NIM analysis, our average portfolio spread is flat at 6.3% March 31st versus June 30th. But our yield has decreased from 8.4% at March 31st to 7.9% at June 30th. This is driven by the continued decline in LIBOR. The weighted average LIBOR floor on our investment portfolio is 85 basis points. We saw floors generally kick in towards the end of the second quarter. You can also see on this slide that our cost of debt continues to come down, driven also by the decline in LIBOR. Our cost of debt declined from 4.2% at March 31st to 3.6% at June 30th. So pulling the lens back for a moment, Thank you for joining us. At December 31st, three-month LIBOR was 191 basis points. For the first quarter, average three-month LIBOR was 153 basis points. And for the second quarter, average three-month LIBOR was 59 basis points. And today, three-month LIBOR is sitting around 25 basis points. That's a pretty drastic change in a short amount of time. Based on when LIBOR elections were made and the LIBOR decline over the past few months, Thank you for joining us today. All of our dividends mapped out on slide 17 of our earnings presentation. Our fee waiver expires during October of this year, and our advisor is not extending or renewing the fee waiver. I mentioned earlier in my remarks that our NII for the second quarter was $0.34 per share. If you were to impact this amount for the full effect of fees, our 1.5% management fee and 17.5% performance fee that will be in effect starting in the fourth quarter of this year, Our NII this quarter would have been 24 cents per share. I would note this obviously does not take into account continued growth in our portfolio between now and the fourth quarter. Craig will talk more about our dividend coverage shortly. I also wanted to review some of the key topics I covered last quarter, including our financial philosophy and funding profile. We continue to be well positioned in the industry given the strength of our balance sheet. Our three structural pillars of low leverage, significant liquidity, Thank you for joining us today. Our weighted average debt maturity is over six years, and we do not have any debt maturities until June of 2023. As it relates to our financing activity, we were very active this quarter. You can see an overview of all of our financings on slide 16 of the earnings presentation. To sum up our activity, we completed our fourth CLO financing from one of our drop-down SPV facilities. We added commitments to our senior secured revolver, Taking total commitments here to over $1.3 billion, and last month we completed our fourth unsecured public bond issuance. We continue to have one of the lowest leverage levels in the industry at .60 times debt to equity. As of June 30th, we had $2.4 billion of liquidity, pro forma for the $500 million bond issuance I just mentioned. In total now, we have issued $2 billion of unsecured debt, Thank you for joining us. Thank you all very much for your support and for joining us on today's call. Craig, back to you.