Scott Kennedy’s BDC Earnings Series: Assessing Blue Owl Capital’s Performance For Q1 2024
Summary
This earnings assessment article reviews OBDC’s NAV and NII performance during Q1 2024 and compares results to expectations. Earnings remain a driver to stock performance.
OBDC’s NAV matched my/our expectations (well within range; relatively unchanged) while its NII was a minor-modest underperformance (low end of range; modest decrease).
OBDC’s NII underperformance mainly related to repositioning away from some riskier 2nd lien loans while originating 1st lien loans. This resulted in OBDC’s yield metrics to decline more than anticipated.
OBDC’s non-accrual percentages slightly increased (correctly anticipated) while PIK income continued to be elevated-very elevated (remains concerning).
No change in OBDC’s percentage recommendation ranges or risk/performance rating. OBDC is currently deemed slightly-modestly overvalued (SELL).
Formatting Change to this Article Series
We have recently changed the format of this earnings-related article series (less wording, more visual images). This process remains ongoing and future changes will likely occur.
1) OBDC:
Commentary
Quarterly NAV Fluctuation: Basically an Exact Match (0.4% Variance).
NII: Minor-Modest Underperformance ($0.031 Per Share Variance).
An “as expected” quarter regarding Blue Owl Capital’s OBDC 0.00%↑ NAV in my opinion. OBDC reported a very minor quarterly NAV increase while I projected a very minor quarterly NAV decrease. As such, OBDC’s underlying portfolio company valuations (both realized and unrealized) largely matched my expectations (technically a very minor outperformance). OBDC reported a combined net realized loss and unrealized appreciation of less than ($1) million during Q1 2024. In comparison, I projected a combined net realized loss and unrealized depreciation of ($35) million. OBDC’s total investment portfolio size was $12.4 billion as of 3/31/2024. Upon a quick review, there were no “notable” surprises regarding quarterly FMV fluctuations in any particular portfolio company (which numbered 198 as of 3/31/2024).
A slightly - modestly underperforming quarter regarding OBDC’s NII in my opinion. OBDC reported a modest quarterly NII decrease while I projected a minor decrease. Let us briefly discuss this minor - modest underperformance.
First, when excluding FMV fluctuations, OBDC decreased the company’s investment portfolio size by ($0.3) billion during Q1 2024. This was due to lower OBDC quarterly loan originations and a minor increase in prepayments/repayments/restructurings. In comparison, I projected OBDC would decrease the company’s investment portfolio size by ($0.2) billion. As such, a slightly smaller investment portfolio size.
Second, OBDC reported a weighted average annualized yield of 12.40% and 12.10% during Q4 2023 and Q1 2024, respectively (0.30% decrease). This past quarter, this was a (0.20%) underperformance when compared to my expectations. This was a bit of a surprise and was a larger decrease when compared to most (if not all) covered sector peers. As such, further investigation was needed. Upon a “deeper dive”, OBDC decreased the company’s proportion of usually riskier 2nd lien loans by ($0.8) billion during Q1 2024 while increasing its proportion of usually safer 1st lien loans by $0.4 billion. Simply put, riskier 2nd lien loans carry a higher effective interest rate when compared to 1st lien loans (typically by several percentage points). This shift in investment portfolio composition was not fully anticipated on my end. Even when excluding the impacts of this shift, I project a gradual decrease in this metric over time which is already factored in my/our modeling and percentage recommendation ranges. In addition, it should be noted the higher LIBOR/SOFR/PRIME rose (over 500 basis points [bps] in 1.5 years), the more underlying credit risk (non-accruals) needs to be respected (and monitored). This will have heightened importance as we head through 2024.
So, I believe OBDC reported an “average” quarter (not great, not horrible). A risk/performance rating of 3.5 for OBDC remains appropriate in the current environment/over the foreseeable future.