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spk04: Good morning everyone and welcome to Blue Owl Capital Corporation 3's second quarter 2024 earnings call. As a reminder, this call is being recorded. At this time, I'd like to turn the call over to Mike Mastichio, Head of BDC Investor Relations for OBDE.
spk00: Thank you, operator. Good morning and welcome to the second quarter 2024 earnings call for Blue Owl Capital Corporation 3. I'd like to remind listeners that remarks made during today's call may contain forward-looking statements which are not a guarantee 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 forward-looking statements as a result of a number of factors, including those described in OBDE's filings with the SEC. The company assumes no obligation to update any forward-looking statements. Certain information discussed on this call and in the company's earnings materials, including information related to portfolio companies, was derived from third-party sources and has not been independently verified. The company makes no such representations or warranties with respect to this information. Yesterday, Blue Owl Capital Corporation 3 issued its earnings release and posted an earnings presentation for the second quarter ended June 30, 2024. These should be reviewed in conjunction with the company's 10Q filed yesterday with the SEC. In addition, the company issued a press release announcing that OBDE has entered into a merger agreement with Blue Owl Capital Corporation, or OBDC, our affiliate BDC, also traded on the New York Stock Exchange. The merger is subject to satisfaction of customary closing conditions, including shareholder approval. We have also posted an investor presentation with additional details about this transaction. All materials referenced on today's call, including the earnings press release, earnings presentation, 10Q, and merger presentation, are available on the Investors section of the company's website at BlueOwlCapitalCorporation3.com. With that, I'll turn the call over to Craig Packer, Chief Executive Officer of OBDE.
spk03: Thank you, Mike. Good morning, everyone, and thank you for joining us today for our second quarter earnings call. I'm also joined by Logan Nicholson, OBDE's president, and Jonathan Lamb, our Chief Financial Officer. Yesterday, after market closed, we announced that OBDE has entered into a merger agreement with Blue Owl Capital Corporation, with OBDC as the surviving company. On the call today, I will start with a brief overview of OBDE's quarterly results, and then would like to share my thoughts on the anticipated benefits for shareholders of the combined company. I will then hand it over to Logan, who will provide an overview of our investing activities for the quarter. Next, Jonathan will further discuss the results for the quarter and cover additional details of the merger agreement. We're very pleased to report another strong quarter, delivering double-digit returns and maintaining excellent credit performance across the portfolio. Net asset value per share ended the quarter at $15.56, up .8% from a year ago. We once again delivered a strong annualized ROE of 10.5%. Net investment income was $0.41 per share, up one penny from the adjusted net investment income we delivered last quarter, and in excess of our second quarter regular dividend of $0.35 per share. Results for the second quarter reflect the benefits of our consistent credit performance, a higher rate environment, and portfolio growth as we increase leverage towards the higher end of our targeted range. Next, I would like to spend a moment on our recently announced combination. We have long believed that it would make sense to streamline our BDC platform under the right conditions, and now is the right moment to do that. Both OBDC and OBDE have generated near-record returns over the last year, and they have demonstrated the quality of their portfolios. The public BDC market environment has been solid, with BDC equities trading at valuation to historical averages, and as an asset class, private credit has performed exceptionally well over the past few years. We believe that all of these elements combine to create the right alignment to deliver on our vision. While the markets have seen increased short-term volatility over the past week, we remain confident in our portfolios and the value proposition that this merger will offer to shareholders. As Jonathan will elaborate on later, this transaction has also been thoughtfully structured to allow for the best mutual outcome, whatever the market environment. While we are confident in OBDE on a standalone basis, and we believe it will continue to be successful, we are excited about the benefits we expect this merger will bring to shareholders of OBDE if it is approved. If you have not spent time evaluating the OBDC portfolio, you will see it is extremely similar to OBDE's portfolio. Both funds employ the same investment strategy, and we have been allocating the same investments to both portfolios since OBDE's inception in 2020. As a result, approximately 90% of the investments in OBDE are also in OBDC. We expect that the proposed merger with OBDC will add approximately $13.3 billion of investments to OBDE's portfolio, bringing total investments to approximately $17.7 billion as of June 30. It would also establish our position as the second largest publicly traded BDC by total assets. We believe shareholders will benefit from the increased scale of the combined company in multiple ways. First, the merger would provide further diversification in our combined portfolio. Upon completion of the merger, the average position size in our portfolio will be less than 40 basis points. Diversification has always been critical to risk mitigation, reducing reliance on the success of any one investment, and this merger strengthens that effort. Second, we will maintain excellent credit quality in the combined portfolio. Often adding this much incremental scale comes with increased risk. However, this merger allows us to combine with a high quality diversified portfolio that has been managed by Blue House since inception. Third, as a result of how this transaction is structured, OBDE shareholders will be receiving shares of OBDC, which traded at a higher multiple and offered deeper liquidity. Today, shares of OBDC are much more liquid than shares of OBDE, and we expect the larger market capitalization of the combined company will further enhance OBDC's liquidity. Fourth, the combined company is expected to have more diverse and efficient access to capital, including the potential to access debt financings at more favorable terms. We expect OBDE to benefit from OBDC's lower average cost of debt, which was over 100 basis points lower as of June 30. OBDE shareholders should also benefit from OBDC's credit ratings profile, which are generally better. We expect the transaction to be immediately accretive to debt investment income for shareholders of OBDE, driven by OBDC's higher portfolio yield and lower cost of debt, and operational savings we expect to generate through the elimination of duplicative expenses, which we estimate could be in excess of $5 million in year one. Over the long term, NAI should benefit from further incremental yield as we optimize the portfolio mix and generate cost savings from capital structure improvements. Finally, as a sign of support from Blue Owl, OBDE and OBDC will be reimbursed for fees and expenses associated with the proposed merger, up to a cap of $4.25 million in total, which will be paid by OBDC's advisor if the proposed merger is consummated. With that, I'd like to turn to Carla Logan to discuss our investment activity this quarter.
spk02: Thank you, Craig. We continue to find attractive opportunities to commit capital, deploying approximately $1 billion in new commitments during the quarter. This was our second most active quarter of Originations, demonstrating our focus on making substantial progress towards increasing our leverage, and brings the total number of companies in our portfolio to 207, and the average investment size to approximately 50 basis points. Originations for the second quarter were offset by $338 million in sales and repayments. In line with our commentary in recent quarters, on average, we continue to see steady revenue and EBITDA growth across our portfolio companies. Our borrowers have successfully navigated a year of the higher interest rate environment and have thoughtfully adapted their business models in response. Across the portfolio, our average interest coverage remains around 1.7 times, consistent with the level we've been highlighting as the expected trough coverage in today's higher rate environment. Our non-accrual rate is half a percentage point of fair value of debt investments, reflecting the addition of Pluralsight this quarter, a small 24 basis point position. And finally, the subset of names on our watch list remain steady quarter over quarter, and we do not see any material pick up in amendment activity or signs of stress. Our portfolio continues to be stable and resilient, giving us confidence in our ability to deliver strong credit performance and returns for our shareholders going forward. Now I'll turn it over to Jonathan to provide more detail on our financial results and where to find materials on our proposed merger with OBDC.
spk01: Thanks, Logan. We ended the quarter with total portfolio investments of $4.3 billion, outstanding debt of $2.5 billion, and total net assets of $1.9 billion. Our second quarter net asset value per share was $15.56. Similar to last quarter, we meaningfully over-earned our regular dividend, resulting in a six-cent benefit to NAV. We also paid a previously declared special dividend of six cents, one of five special dividends announced in conjunction with our listing earlier this year. Finally, NAV was impacted by credit-related markdowns primarily on one investment. The key focus this quarter was on continuing to increase leverage. We have made significant progress to this end, finishing the quarter at 1.22 times net debt to equity, up from 1.04 times last quarter, and near the high end of our target leverage range of 0.9 to one and a quarter times. Turning to the income statement, we earned net investment income of 41 cents per share in the second quarter, six cents above our regular dividend. As a result of our strong earnings, we earned an annualized return on equity of 10.5%. Our earnings this quarter also reflect our first full quarter of normalized management and incentive fees since listing earlier this year. Our board declared a third quarter regular dividend of 35 cents per share, in line with the level we set at our listing two quarters ago. As a reminder, in conjunction with the listing, the board also previously declared five special dividends of six cents per share, the first of which was paid in June, as I mentioned. Next, turning to the merger, I'd like to highlight that additional information regarding the proposed merger will be available in the joint proxy statement prospectus that OBDC and OBDE intend to file publicly in the coming weeks. Those filings will be accessible on the SEC's website, as well as OBDE and OBDC's websites. Additionally, I'd like to direct you to the investors section of OBDE's website, which includes an investor presentation with additional details about this transaction, and the events section of OBDC's website, which includes a replay of the Q2 2024 earnings call from this morning, with additional details about the rationale behind the proposed merger. At a high level, the merger is structured to allow for both OBDC and OBDE shareholders to benefit, and is structured to value OBDE at a potential premium to NAV depending on trading price of OBDC prior to closing. In terms of timing, we are expecting to close the transaction in the first quarter of 2025, subject to customary closing conditions, including shareholder approval. Between today and the close of the transaction, shareholders should expect to receive at least one more regular dividend of 35 cents per share, plus two special dividends totaling 12 cents per share. Around the time of closing, subject to board approval, shareholders can also expect to receive the last two special dividends totaling another 12 cents per share, plus all additional undistributed spillover income left after the payment of the previously declared dividends, which would total 19 cents per share as of June 30th. Altogether, these equate to a return of approximately 13% on dividends alone for shareholders holding the stock as of the close based on Monday's closing price. Finally, if the merger closes prior to January 25th, the last lockup on shares of OBDE will be waived. And now I'll hand it back to Craig to provide final thoughts for today's call.
spk03: Thanks, Jonathan. I know we have already covered a lot on today's call, so I'll spend just a minute on the market environment we experienced in the second quarter. Certainly, the direct lending market is feeling more competitive pressure as the public loan market remains strong and M&A financing volumes are light. We saw elevated levels of repricing and refinancing activity in the quarter, which reduced spreads. However, we do see signs of opportunities to deploy capital into large, high quality companies. Even with tighter spreads, we're earning approximately 11% on new loans. We also continue to successfully originate new investment opportunities to offset repayments and are towards the higher end of our target leverage range. While new deals face some economic pressure, one area where we will not sacrifice is on maintaining appropriate levels of structural protection in our documentation and capital structures. Overall, we are confident in how our platform is positioned today, and we expect M&A activity will eventually resume at a more normalized level, which will allow market conditions to ease. Our proven ability to provide significant capital for some of the largest financings will be a real differentiator in this environment. Having said that, we have all observed what has happened in the markets over the past few days, and I thought it might be helpful to offer some perspective. BDC equities have traded very well up until recently, and that performance reflected BDC's strong earnings and steady credit quality. Although BDCs have traded off recently, we are not seeing any signs in our portfolio to justify this price movement. To the extent investors are concerned about the economic outlook, we believe that our strategy of investing in a diversified portfolio of first-ling term loans can offer a defensive opportunity in more volatile markets. For those concerned about the potential for an economic downturn, we have consistently been investing in recession-resistant businesses and sectors to buffer our investors from the inevitable economic cycles. In addition, I also want to highlight that market volatility can be helpful for us as direct lenders. We provide certainty of execution to our borrowers, and the value of that certainty increases as the public markets become more volatile. It is too early to say how long this will last, but we are well positioned with the capital, resources, and long-term investing time horizon to take advantage of opportunities as they arise. To close, I want to highlight the other major milestone we accomplished earlier this year, listing on the New York Stock Exchange in January. Since then, we have been very focused on delivering on what we communicated at the time of listing, increasing our leverage to the high end of our target range, maintaining excellent credit quality, which together with our increased leverage has allowed us to generate an attractive risk-adjusted return, and offering accelerated liquidity to our shareholders earlier this summer. While OBDE is a successful public company standalone, we believe this transaction combined with OBDC is another step in creating shareholder value. We believe that the proposed merger will deliver a more scaled and diversified portfolio to help navigate the dynamic operating environment ahead, while also allowing shareholders to benefit from increased efficiencies and a lower cost of financing. Upon merger close next year, as the second largest public BDC, we expect that the combined company will continue to be a market leader. On behalf of the entire Blueisle team, thank you in advance for your support and for joining us on today's
spk04: call. That concludes today's call. All parties may now disconnect. Have a good day.
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