Release Date: August 08, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Blue Owl Capital Corp (OBDC, Financial) reported a strong quarter with $0.48 of net investment income per share, up from the previous quarter.
- The company announced a merger with Blue Owl Capital Corporation III (OBDE), which is expected to provide long-term strategic value and increase total investments to approximately $17.7 billion.
- The merger is anticipated to enhance portfolio diversification, improve trading liquidity, and provide access to lower-cost debt financing.
- OBDC has maintained a strong annualized ROE of 12.6% and delivered a double-digit dividend yield for six consecutive quarters.
- The merger is expected to result in operational efficiencies and cost savings, with estimated savings of over $5 million in the first year.
Negative Points
- The merger is subject to customary closing conditions, including shareholder approval, which introduces uncertainty.
- There were credit-related markdowns on two investments, resulting in a NAV decline of $0.09 for the quarter.
- The market environment has seen increased short-term volatility, which could impact future performance.
- OBDC's leverage is at the high end of its target range, which may limit flexibility in managing debt.
- The merger could initially result in slight dilution to net investment income before accretive benefits are realized.
Q & A Highlights
Q: Looking at new commitments at OBDC, should we expect a mix of deals between new and existing companies, or could this skew more toward new companies as M&A activity picks up?
A: Jonathan Lamm, CFO and COO, explained that the platform's strength lies in its origination efforts, aiming to see all new opportunities. While refinancing existing companies is easier, they are open to new names. As M&A activity increases, they expect a shift towards new companies, but decisions will be made organically based on opportunities.
Q: Regarding the merger with OBDE, how do you see the synergies impacting GAAP ROEs, and could they drive ROEs above 10%?
A: Craig Packer, CEO, noted that OBDC has achieved strong returns, currently at 12.6%. OBDE's portfolio is pristine, and they expect to improve its returns to match OBDC's through scale benefits and optimization. They aim for low double-digit returns, with rates being a significant driver.
Q: On the merger, will discount amortization or premium amortization be excluded from the incentive fee calculation?
A: Jonathan Lamm confirmed that they intend to adjust the incentive fee calculation to account for these factors, as outlined in the merger structure filings.
Q: What impact do you expect the merger to have on borrowing costs, given the increased scale?
A: Jonathan Lamm mentioned that the merger should tighten spreads relative to peers in the investment-grade space, potentially reducing borrowing costs by 5 to 15 basis points. Craig Packer added that the increased diversification and performance should lead to tighter trading spreads over time.
Q: Will there be any change in strategy regarding common equity exposure post-merger?
A: Craig Packer stated there will be no change in strategy. The majority of common equity exposure is in diversified portfolios of credit assets. They will continue to invest in specialty lending verticals, with OBDE's addition allowing for growth without increasing the percentage of common equity.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
