Blue Owl Capital Corporation

Good morning and welcome to Owl Rock Capital Corporation's third 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 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 third quarter ended September 30th, 2020. This presentation should be reviewed in conjunction with the company's Form 10-Q filed on November 4th 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 third quarter earnings call. This is Craig Packer, and I'm 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 remain safe and well. I will start today's call by briefly discussing our financial highlights for the third quarter before providing an update on our portfolio and deal activity in the quarter. Then after Alan covers our financial results, I will discuss our outlook and make some closing remarks. Getting into the third quarter financial highlights, net investment income per share was 33 cents. We ended the quarter with net asset value per share of $14.67. up $0.15 from the second quarter. We are pleased to report the second consecutive quarterly increase in the fair value of the portfolio since the end of March. Looking forward for the fourth quarter, our board has declared a dividend of $0.31 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 $0.08 per share. As planned, the fourth quarter special dividend will be the final of our previously declared special dividends that were put in place as part of our IPO in 2019. Regarding our balance sheet, we remain very well capitalized with $1.8 billion of liquidity. We ended this quarter with leverage of 0.72 times, reflecting an increased pace of originations in the quarter. We are seeing improving levels of deal activity and continue to expect to achieve leverage within our targeted range of 0.9 to one and a quarter times by the second half of 2021. As announced in our earnings release yesterday, our board has authorized a new share repurchase program for up to $100 billion of our stock over the next 12 months. We believe this is a valuable tool for us to have going forward. Turning to the portfolio, we are pleased with the overall credit performance to date, which by and large has come in towards the higher end of potential outcomes we could have hoped for given the economic environment. This quarter, many of our borrowers saw improved operating metrics and revenues in line with the broader economic reopening. They also implemented cost savings measures, which improved profitability. Broadly speaking, we are seeing economic activity return to a more normalized pace, approaching pre-COVID levels. Our internal credit ratings metrics are consistent with last quarter. Names in our one or two rating categories, which are names performing in line with or exceeding our expectations at the time of underwriting, continue to comprise approximately 88% of the fair value of the portfolio. The vast majority of our portfolio continues to demonstrate solid financial performance and has proved to be resilient in the face of a challenging economy. The percentage of our lower rated names, rated three, four, or five, which are underperforming expectations is 12% of fair value, largely unchanged from last quarter. While there is always some natural movement between ratings categories, we are pleased that the number of underperforming credits has stabilized. Most of our credits are seeing improving results and many are exceeding their revised COVID budgets. While there are certainly a few which will have a longer road to recovery. As of quarter end, 109 of our 110 portfolio companies were current on their interest. We currently have two names on non-accrual status. Swipe Acquisition Corp., which we added to non-accrual status this quarter, is not current on its interest. We are finalizing discussions with Swipe regarding a long-term solution, which, if completed, would include Owl Rock becoming the controlling shareholder and providing the company with the necessary support to execute its operational plan and growth strategy. CIBT Global, which was added in the second quarter, remains current on its interest with a portion paid in cash and a portion in PIC. These two investments represent less than 1.5% of the total fair value of the portfolio, which is consistent with our non-accruals last quarter. One name I'd like to spend a minute on is National Dentex, which was placed on non-accrual status in the second quarter, but was placed back on accrual status this quarter. As this is one of the first challenge credits we've had in our portfolio, I'd like to walk through the situation and ultimate outcome. National Dentex, which shows as Geodym Corporation on our schedule of investments, is a leading dental lab business that serves dentists across the U.S. The company was significantly impacted by the shutdown of dentist offices and the subsequent financial impact resulted in it being placed on non-accrual. However, it has rebounded nicely in recent months as dentist offices have reopened. We worked very closely with the sponsor and the Dentex management team to embark on a sale process of the company, which I'm pleased to announce has had a successful outcome. In October, National Dentex agreed to be sold to a new private equity firm. This transaction closed last week, and our loan was repaid at par, which will result in the full reversal of the unrealized loss we had taken. We are pleased with the outcome of this process. We believe it reflects the underlying strength of our portfolio companies, even those which underperform. While every situation is unique, we believe National Dentex demonstrates the downside protection we strive for when we invest. In addition, as we've continued to grow the team over the last year, we have invested in our portfolio management and workout resources and believe that this outcome will reflect the strength of our team and our ability to work through challenging situations. After heightened amendment activity in the second quarter, we saw a reduction in the number of amendment requests, with three material amendments this quarter down from eight in the second quarter. Similar to the themes we discussed last quarter, we saw a limited number of requests for covenant relief for a defined period of time in exchange for higher economics representative of the borrower's current risk profile. No additional borrowers were moved to pick interest in the quarter, and pick interest continues to represent less than 5% of total investment income. Looking forward, we may see some amendment requests from additional borrowers, but largely we feel that we have addressed those situations in which borrowers were most impacted by the economic shutdown, and that we have provided sufficient runway for those businesses to operate and recover. While we remain cautious given the broader economic uncertainty, we have been pleased with the pace of recovery our borrowers have experienced to date. Moving on to investment activity, we entered the quarter with a very cautious posture. But as the period wore on, we saw both an economic rebound and an increase in deal activity. We were able to capitalize on this activity and were pleased to close on a number of attractive new investments. Gross originations for the quarter were $844 million, with net funded originations of $599 million, which was up from net funded activity of $142 million in the second quarter. We had $48 million of repayments, noting there were no full repayments this quarter. We do expect to see an increase in repayments over time. Certainly COVID and the economic disruption has impacted repayment catalysts for the near term. Overall, we added eight new portfolio companies and serve as the administrative agent on the majority of the origination volume this quarter. Largely, all of our origination volume was for new borrowers as we saw less add-on volume for existing portfolio companies. We do expect to see add-on volumes increase in the next few quarters as we are seeing many of our portfolio companies return to more normal operating levels and strategic discussions are picking back up. We are pleased with the investments we closed this quarter, which we believe offer compelling economic and structural terms for businesses which have proven to be resilient in the current economic climate. I note that the weighted average spread of new investments this quarter was roughly 720 basis points. I'd like to highlight two of the investments which closed this quarter. Across the Alrock platform, we committed as the sole lender to a $410 million first lien facility to support the acquisition of Sunny's Enterprises by Genstar Capital. Sunny's is a leading provider of equipment and supplies to conveyor car wash operators in the U.S., a sector which has continued to demonstrate strong performance during the COVID crisis. The facilities are attractively priced at L plus 700 with a 1% LIBOR floor and benefit from strong call protection. We are pleased to once again demonstrate our ability to provide sizable commitments and serve as a one-stop financing provider. Another name worth highlighting was our investment in the $250 million second lien term loan for Shearer's Foods. The company, which is owned by the Ontario Teachers Pension Plan, is a leading contract manufacturer of snack foods in the U.S. Consistent with our approach to second lien investments, we believe Shearer's was an attractive investment due to significant EBITDA and low loan-to-values. While second liens have been a more modest portion of our portfolio to date, in the current market we are seeing increased demand from private equity firms in directly placing second liens. We believe these opportunities were done for the right credit profile, can offer attractive risk-adjusted returns. Our portfolio at quarter end now stands at $9.9 billion across 110 portfolio companies. We feel that the performance of the portfolio during COVID has validated where we have focused, primarily first lien investments in upper middle market, recession resistant, sponsor backed businesses. Now I'll turn it over to Alan to discuss our financial results in more detail.

Thank you, Craig. Good morning, everyone. It's great to be speaking with everyone again, and I'd like to wish everyone the best in these continued unusual times. Thank you very much for your partnership and support of our business. To start off, I'll refer to our earnings presentation, starting with slide seven. You can see that we ended the third quarter with total portfolio investments of $9.9 billion, Outstanding debt of $4.3 billion and total net assets of $5.7 billion. Our net asset value per share increased to $14.67 as of September 30th compared to $14.52 as of June 30th. We ended the quarter with leverage of 0.72 times debt to equity and $1.8 billion in liquidity. Our dividend for the third quarter was $0.31 per share plus an $0.08 per share special dividend. and our net investment income was 33 cents per share. On the next slide, slide eight, I'm gonna talk through in a bit of detail the results of our revenues and expenses for the third quarter. You can see total investment income for the third quarter was 187 million, down slightly from 190 million last quarter. This $3 million decline was driven by three items. We saw a $4 million decline in other income and other fees during the third quarter, largely driven by fewer amendments and repayments as Craig touched on earlier. The next item is in connection with us putting Swipe Acquisition Corp on non-accrual this quarter. As of June 30th, Swipe was operating in forbearance as we were in constructive negotiations with the sponsor on a comprehensive amendment. We had Swipe on accrual status as of June 30th as we were awaiting the receipt of our interest payment. Because this was on accrual, we recognized income in the second quarter. As of September 30th, the amendment had not closed, and as a result, we placed SWIFE on non-accrual status. Due to this, we did not recognize any income associated with this portfolio company in the third quarter, and in addition, we reversed the income we had recognized in the second quarter. The income for each quarter represented a little over $3.5 million, or one penny per share per quarter, so this reduced third quarter NII by a little over $7 million, or approximately two cents per share. Lastly, we only saw an increase of approximately $8 million in interest income from our investments. Although our portfolio increased in size this quarter, almost half of our originations were towards the end of September, so not driving interest income up as much as if the originations were weighted throughout the quarter. In 4Q, we'll see a pickup of interest income driven in part by now having a full quarter of interest income for our 3Q originations. So as you can see, the net of all this is the $3 million decline in investment income this quarter. To hit the expense side briefly, net expenses were roughly flat quarter over quarter. In 2Q, we had a one-time non-cash item that increased interest expense. Stripping that out, interest expense is up quarter over quarter, driven by increasing leverage in the third quarter. These two items basically net out, hence expenses are roughly flat quarter over quarter. So pulling the lens back a bit, we continue to make good progress towards earning our dividends and are on track to achieve our target leverage by the second half of 2021. We expect to continue to pay our regular dividend of 31 cents per share and would anticipate returning a modest amount of capital in the interim. So to wrap up our financial results discussion, I'll mention a few other quick items. As a result of the fair value of our portfolio increasing from 95.1% to 96%, We had $88 million of net unrealized gains during the third quarter. Our other operating expense ratio continues to be among the lowest in the industry at 22 basis points on a trailing 12-month basis. And our undistributed distributions as of September 30th is $0.05 per share. A few final closing comments before handing back over to Craig. We continue to be well positioned in the industry given the strength of our balance sheet. Our three structural pillars of low leverage, Thank you for joining us. and we do not have any debt maturities until June of 2023. We continue to have one of the lowest leverage levels in the industry at 0.72 times debt to equity. As of September 30th, we had $1.8 billion of liquidity. In total now, we have issued $2 billion of unsecured debt, which brings us to a current funding mix of 45% unsecured debt. Because of this, we continue to have a meaningful amount of excess collateral for our secured facilities. and we continue to have a significant cushion to our new regulatory asset coverage of 150%. As we have previously mentioned, our updated target leverage ratio is 0.9 to 1.25 times debt to equity. Overall, our funding profile continues to be very sound and we continue to be in a very good position. Thank you all very much for your support and for joining us on today's call. Craig, back to you.