Blue Owl Capital Corp (OBDC) 2019 Q2 法說會逐字稿

Good morning and welcome to Owl Rock Capital Corporation's second-quarter 2019 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 the 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, 2019.

This presentation should be reviewed in conjunction with the Company's Form 10-Q filed on July 31 with the SEC.

We 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 our website.

I will now turn the call over to Craig Packer, Chief Executive Officer of Owl Rock Capital Corporation.

Please go ahead.

Thank you.

Good morning, everyone, and thank you for joining us today for our first earnings call as a publicly traded company.

This is Craig Packer, and I am CEO of Owl Rock Capital Corporation and the Co-Founder of Owl Rock.

Joining me today is Alan Kirshenbaum, our Chief Financial Officer and Chief Operating Officer.

Before we begin I would like to take a moment to welcome our new and existing investors as well as members of the research community to our earnings call this morning.

As this is our first call since we priced our initial public offering two weeks ago, I would like to begin by briefly discussing our IPO.

On July 17, we priced an IPO of 10 million shares of ORCC on the New York Stock Exchange at a price of $15.30 per share.

Gross proceeds from the IPO totaled approximately $153 million.

We're really pleased with the outcome of the offering which resulted in ORCC becoming the second largest publicly traded BDC based on our current equity market capitalization of approximately $6 billion.

Since we began Owl Rock in 2016, we've tried to take an innovative and shareholder friendly approach and we pursued our IPO in a similar manner.

Our IPO included a number of shareholder friendly features which we believe contributed to successful outcome.

And Alan will review those in his comments as these actions will continue to take effect throughout our first year as a public company.

As a reminder, on July 9, as we began our IPO road show we pre-released certain selected financial results including net asset value per share, our quarterly net investment income per share and quarterly dividend per share.

Today we are reporting strong results for the second quarter, right in line with the ranges that we provided at that time.

Net investment income per share was $0.42 for the second quarter and we ended the quarter with net asset value per share of $15.28.

In addition, our Board of Directors has declared a second quarter dividend of $0.44 per share.

This is the last floating-rate dividend we will pay as our Board has declared a third-quarter dividend of $0.31 per share, in addition to a series of six previously declared special dividends throughout 2019 and 2020 that Alan will discuss later in more detail.

We are pleased with our results which continue to deliver strong returns for our investors.

For the three months ended June 30, we generated an annualized ROE of 11% based on net investment income and an ROE of 11.5% based on net income.

Given this is our first call as a public company, I'd like to spend a few minutes discussing the steps we took to build Owl Rock and what we believe our key differentiators are for those of you who are relatively new to our story.

Owl Rock is an independent alternative asset manager focused on direct lending and led by senior investment professionals with significant experience in middle market lending and investing.

Owl Rock Capital Corp., or ORCC, is a newly listed company that has been operating as a business development company for over three years.

When Doug Ostrover, Marc Lipschultz and I founded Owl Rock in 2016 we sought to build a market leading drug lending platform.

We feel scale is very important in the direct lending space as it allows us to lend to bigger companies, which we believe by and large are safer credits, while maintaining high levels of portfolio diversification.

It also allows us to be a distinctive and highly valued financing source of high-quality borrowers and private equity sponsors.

In order to scale we focused on raising committed drawn down institutional capital and we have been deploying this capital since our inception.

Having this capital base allowed us to make a significant investment in our direct origination capabilities, which has driven substantial proprietary direct deal flow.

In addition to my partners and I, we have built a large team of experienced senior investment professionals who are responsible for originating investment opportunities.

We currently have over 50 professionals on our investment team focused on origination, underwriting and portfolio monitoring.

And we believe we have assembled one of the largest and most experienced teams entirely dedicated to direct lending, creating a wide funnel of investment opportunities.

Having a large funnel allows us to be highly selective investors, something we believe is critical to our success.

We've reviewed over 3,500 opportunities since inception from almost 400 different sponsors.

Of those opportunities we've chosen to invest and close on less than 5%.

Our scale coupled with our direct origination model allows us to invest in stable middle to upper middle market companies which we believe are often more durable businesses and better able to withstand the economic cycle or other changes they encounter.

Our underwriting is focused on top-line stability and downside protection, and we perform detailed private side due diligence typically for three months before making an investment.

The weighted average EBITDA of our borrowers was approximately $79 million at quarter end.

These companies are often leaders in their industries, have a strong competitive position, are typically supported by a substantial equity investment from a leading private equity sponsor.

We are very focused on credit documentation of our loans and have a team with deep experience in this area.

Our portfolio today consists of $7.2 billion of directly originated senior secured floating-rate loans designed to deliver returns that are consistently a premium to those available in the public credit markets.

We think our model is working quite well and that is reflected in our second-quarter results.

For Owl Rock the second quarter was another active quarter on the investment front.

We entered into new investment commitments totaling $953 million, of which $773 million was funded this quarter.

This quarter's pace was very consistent with our first quarter in which we also funded about $800 million of new investments.

During the second quarter 85% of our new investment commitments were first lien term loans and 15% were second lien loans.

As of the end of the second quarter, in total our portfolio was 81% first lien.

We continue to maintain a strong bias towards pursuing capital preservation versus chasing returns in the current market environment.

The percentage of first lien investments in our portfolio has increased almost 10 points versus a year ago and we think this is an appropriate approach at this point in the credit cycle.

These investment commitments were distributed across 26 portfolio companies.

Roughly 75% of this quarter's investment buy-in was across 13 new portfolio companies and Owl Rock was lead arranger or administrative agent on 80% of those deals based on invested dollars.

As a reminder, Owl Rock manages four funds and we routinely will allocate investments across those funds, so the portion of an investment that is going into ORCC is typically not 100% of the overall Owl Rock platform investment.

We view this as a competitive advantage as it allows us to speak for larger investment sizes versus many of our peers, and control economic turns and documentation while maintaining portfolio diversification.

In addition to the new portfolio of companies, 13 investments remain in existing portfolio companies.

These are generally smaller add-ons to current positions at an average investment size of roughly $20 million and these add-ons made up approximately 25% of this quarter's investment volume.

Often these add-ons opportunities were anticipated at the time of our original investment as many private equity firms are pursuing buy-and-build investment strategies which entail additional accretive acquisitions.

It's worth noting here, as a relatively young fund, we do not yet have as much of a benefit as some other funds have in terms of having a large group of incumbent positions.

That being said, our list of portfolio of companies is growing and we expect will continue to grow over the coming years, allowing us to more fully benefit from that dynamic.

We like add-ons as they allow us to intelligently grow our portfolio as we are increasing our exposure to companies we have previously fully underwritten and have been closely monitoring.

This quarter gives a sense of the kind of investment activity that incumbency can drive as we continue to grow.

With 90 portfolio companies now in ORCC, I would also point out that, given our large team of over 50 investment professionals, our ratio of portfolio companies per investment professional is less than two to one, giving us ample capacity for future growth while maintaining rigorous portfolio oversight and support.

We continue to see the benefits of the scale of the overall Owl Rock platform where go to call for companies and financial sponsors and comprise differentiated solutions to our borrowers.

Our ability to underwrite and hold individual positions as large as $200 million to $600 million across the Owl Rock platform is a significant competitive advantage.

On this note, in the second quarter ORCC, along with other vehicles managed by Owl Rock, provided commitments for two loans, both of which were over $225 million in total financing size and were done on a sole basis by Owl Rock.

To pick one example, we were pleased to provide financing to support the acquisition of Corepoint Healthcare by Hg's portfolio company Rhapsody.

Both companies sit in the healthcare IT space focused on data integration software enabling healthcare organizations with disparate systems to seamlessly share patient information.

In this situation our team was able to leverage our institutional knowledge of this asset to provide our client with certainty of execution through a sole commitment for the entire facility.

In addition to originations, repayments are worth spending a few minutes discussing.

This quarter we saw $465 million of repayments, which is our highest level of quarterly repayments since inception, primarily due to the full realization of two large investments in Transperfect Global and Brigham Minerals.

As Alan will touch on in more detail, these repayments were accretive to NII through the call protection and the acceleration of remaining OID.

We expected these repayments and were pleased with the outcome of these investments, more of which I'll talk about in a moment.

But before doing so I wanted to touch on our expectations for repayments going forward.

Typically we make loans with maturities of five to seven years and we assume, as a rough rule of thumb, that investments will have a three-year average life.

To illustrate that point, if you looked at the investments we made in 2016, the first year of our investment activities, about 50% of the loans we made that year have already been repaid, which would be consistent with a three-year average life.

Our high-level expectation would be to see about one-third of the portfolio turn over each year once we are fully vested, which is obviously dependent upon market conditions.

While we are ramping the pace of our repayments is hard to predict and can be lumpy as the timing of a repayment is idiosyncratic to the borrower.

While our piece of repayments increased in the second quarter, as of this moment, based on what we can see, the third quarter is currently pacing at a more modest amount of repayments then we just experienced in Q2.

That said, going forward over time we do expect our overall pace of repayments to increase as our portfolio ages.

It will just take some time to get to that typical repayment pace.

Going back to this quarter, I'd like to talk about Transperfect for a moment as it was a company we liked a lot and I think represents the kind of compelling opportunities we can offer our investors.

Transperfect as a global language service provider offering a broad set of translation services to highly regulated critical end markets.

An example of this would be translating the medical language on prescription labels for large global pharmaceutical clients.

It's a great business with a strong record of historical performance in a highly defensible market position.

In 2018 we provided $420 million of first lien financing on a sole basis with proceeds to support the co-founders' buy-out of the business.

Given our ability to underwrite the entire deal and to provide certainty during a long, complex M&A process, we were able to provide a compelling risk-adjusted investment for our shareholders.

Our facility was priced at L+675 and as the company continued to grow substantially the loan was refinanced this quarter by a commercial bank group and we earned over a 13% gross rate of return.

We are proud of our track record to date.

We have realized over $1.6 billion of invested capital since inception, generating an aggregate gross IRR of over 11.5% on those investments.

When factoring in portfolio leverages our returns are higher.

We will remain steadfast in our commitment to quality underwriting and downside protection.

For this quarter we continue to have no investments on nonaccrual status and, since our inception in 2016, ORCC has not had any principal losses or defaults.

Moving into more portfolio detail we booked a large and diverse portfolio of high quality borrowers which stood at $7.2 billion as of quarter end.

It is broadly distributed across 90 portfolio companies and 27 industries with the largest industry representing just 10% of the portfolio.

The diversification of our top 10 investments continues to improve and is now down to 27% of the portfolio and the average investment size is $80 million.

Over 98% of the portfolio is senior secured and more than 99% of our debt investments are floating rate.

We believe the portfolio is conservatively positioned; 81% of investments were first lien term loans, clearly the highest percentage since our inception.

Although proud of the progress we've made on the investment side, we are equally focused on the liability side of our balance sheet.

This past quarter we accessed the public investment grade bond market with a $400 million senior note offering which was executed while we were still a private BDC.

And we believe we are the first private BDC to execute a public bond offering.

In addition, we completed our first portfolio financing in the CLO liability market and raised $390 million of debt at a highly efficient cost of funds.

Successfully tapping these two markets sets the stage for future cost-efficient financings.

I will now turn the presentation over to Alan to cover additional detail on our financings and our quarterly results.

Thank you, Craig.

To start, on a personal note, it's great to be speaking with everyone again.

My whole team and I have been working hard on behalf of our shareholders to get to this point and it's great to be back.

The results we have posted for the second quarter of 2019, I'm very happy to report are in every way consistent with what we previously guided to.

We will start with reviewing some high-level information, then we'll dive deeper into things like our dividend policy, our financing landscape and some items related to our IPO.

So to start off, on slide 6 of our earnings presentation -- I'll be referring to the earnings presentation throughout my remarks -- you can see that we ended the second quarter with total portfolio investments of $7.2 billion, outstanding debt of $1.6 billion, and total net assets of $5.7 billion.

Our net asset value was $15.28 per share as of June 30 as compared to $15.26 per share as of March 31.

Our dividend for the second quarter was $0.44 per share and our net investment income was $0.42 per share, all in line with the estimates we provided.

On the next slide, slide 7, you can see total investment income for the second quarter was $176 million.

This is up $25 million from the previous quarter or just over 16%.

We should generally expect to see revenue increases for the next several quarters as we continue to leg back into leverage, building up to approximately $10 billion in total investments.

The increase this quarter was partly driven by accelerated amortization of upfront fees and prepayment fees from the full realization of four investments, some of which Craig touched on earlier.

On this slide you will see a breakout of revenues where we provide some additional transparency into the revenue increases I just discussed.

What we have done here at the top of the slide is split out our interest from investments line between, one, interest income earned during the period; and two, income earned from prepayment fees and accelerated amortization of upfront fees from unscheduled full or partial pay downs, both of which run through interest from investments on our income statement.

As you can see, we had a strong level of interest from investments other fees this quarter due largely to the pay downs of Transperfect and Brigham.

Over time this will become a more meaningful component of our revenues.

As for expenses, total expenses for the quarter ended June 30 was $56.7 million.

This is up only $2.9 million from the previous quarter or about 5%, which was primarily due to higher interest expense in connection with putting into place new financings.

Let's talk about our dividend policy and structure for a moment.

The second quarter of 2019 was the final quarter where we operated under a floating dividend policy.

For the second quarter our Board had previously approved a dividend of 100% of our GAAP net investment income.

Therefore the only change in net asset value quarter over quarter would be due to changes in unrealized, and we ended up posting $0.02 per share of net unrealized gains in our portfolio for 2Q.

Our net income was $0.44 per share for the second quarter, which equates to an 11.5% annualized ROE.

This change in net asset value per share and our ROE reflects the combination of strong portfolio performance and an industry low cost structure.

And I mean cost structure in two ways.

First, our other operating expense ratio is 27 basis points for the trailing 12-month period ended June 30, among the very lowest in the industry if not the lowest.

For 2019 we target a range in the mid-20s to low 30s basis points.

The second reason is related to our fees.

As a reminder, since our inception we have only charged a 75 basis point management fee and no incentive fee.

Although our management fee post IPO is 1.5% and our incentive fee is 17.5%, we chose to waive this best-in-class public BDC fee structure and keep for five quarters after our IPO our industry low 75 basis point management fee and no incentive fee.

The way you will see this flow through the income statement in future quarters is our management and incentive fee expense lines will represent the 1.5% and 17.5% fee structure and the waiver line, effectively a contra expense which you will see listed after our expenses on our income statement, will reflect a portion of our fees that we are waving.

This fee waiver is effectively our ability to make special dividend payments which I'll hit on in a moment.

For the third quarter of 2019, our Board had previously approved a dividend of $0.31 per share, which we think of as our long-term fixed dividend.

Our Board set this dividend with a long-term view at a level which we felt was very achievable, a safe conservative dividend level.

Our Board had also approved a series of six consecutive quarterly special dividends.

You can see a picture of our dividend structure for the next 1.5 years on slide 14 of the earnings presentation.

Let me take a moment to explain all of this for anyone new joining us on our call today.

Our special dividend, effectively the fee waiver I just mentioned, is the light blue shaded portion of each bar on this slide.

These start in the third quarter of 2019 and run through and include the fourth quarter of 2020.

For the third quarter of 2019 the special dividend is $0.02 per share.

For the fourth quarter of 2019 the special dividend is $0.04 per share.

And for each quarter in 2020 the special dividend is $0.08 per share per quarter.

As you can see, we provided ourselves a ramp with our special dividend from the third quarter of 2019 through the first quarter of 2020 as we ramp back to our target leverage ratio.

Again, all of these special dividends have already been approved by our Board of Directors for shareholders of record as of the last day of each quarter.

Okay, now to talk about our financing landscape and liquidity for a moment.

As we have previously discussed, we have not opted to increase our regulatory leverage limit.

So, we are still operating under the regulatory capital of one time debt-to-equity and our target leverage is 0.75 times debt-to-equity.

We operate the right side of our balance sheet under three key guiding principles.

The first is diversification, as important on the right side of the balance sheet as it is the left.

We focus on maintaining diversification by the number of financings we have in place, the types of financings and the number of lenders.

As you can see on slide 13, we are very diversified by number and types of financings.

We also have approximately 50 lenders across these financings -- so, very diversified and not beholden to any one lender.

The second is match duration.

As you can see on the right side of this slide, the vast majority of our debt maturities are 2024 and beyond, matched well with the left side of our balance sheet.

And the third is match interest rates.

Since basically all of the left side of the balance sheet is floating rate, the right side of our balance sheet is also floating rate.

So, therefore, when we have done fixed-rate financing, like our unsecured bond issuances, we swap them back to floating.

Now to get into the numbers, our average debt to equity ratio for the three months ended June 30 was 0.65 times.

We calculate our average debt to equity ratio by using daily debt outstanding and for equity we start with our prior quarter end net asset value and adjust on a daily basis for equity issuances, which historically would be capital calls from our private phase investors and DRIP issuances.

As of June 30, our reported quarter-end debt-to-equity ratio was 0.24 times, a reflection of the cash proceeds received from our final capital call of $1.6 billion towards the end of June, which we used to temporarily pay down outstanding secured debt.

Based on net deal fundings in July, we are on track and well on our way to starting to leg back into our target leverage of 0.75 times debt-to-equity.

We do estimate it could take approximately 9 to 12 months to get back to our target leverage, but we have made good progress so far.

Craig touched on repayment pace earlier, so to remind everyone, repayments have an impact on earnings in two ways, both on legging back into leverage as well as the earnings boost from accelerated amortization of upfront fees and call protection.

As it relates to our credit facilities, we were very active this quarter.

We did both a CLO takeout from SPV Asset Facility 2 and an unsecured public bond issuance.

Both of these financings were very well received by the market.

We amended and upsized our revolving credit facility, increasing total commitments from $600 million as of March 31 to approximately $1.1 billion as of today inclusive of lender closings post quarter end.

We have an uncommitted accordion feature to our revolver which would allow us to increase the size of this facility up to $1.5 billion over time.

And finally, we terminated our subscription credit facility.

This facility was collateralized by the unfunded commitments of our private [phase] investors and those commitments were fully funded this quarter when we did our final capital call in June.

Our average stated interest rate on debt outstanding was 5.5% for the second quarter.

Taking a step back, as you can see all the different financings we have put in place here, we have as much access to capital as just about anyone else out there, access and size.

Our cost of debt is evolving due to this, so our costs here will go up a little in the short term as we lose the inexpensive sub line, but we expect over time will then come down.

So, to wrap up with a few other items and reminders, we have four investment grade credit ratings from S&P, Fitch, Moody's and Kroll.

These ratings provide us the ability to continue to execute in the debt capital markets as we did with our unsecured public bond issuance during the second quarter.

We would expect the bulk of future financings to be CLO finances, CLO takeouts from our SPV drop-down financing facilities and unsecured public bond issuances.

We have a significant amount of available liquidity.

We can borrow over $1.7 billion under our secured financings as of June 30.

That is clearly a significant amount of liquidity to be able to operate under and gives us an advantage in the market.

We have put in place a solid foundation of financings and we intend to continue to access the capital markets as efficient and flexible sources of financing.

As you can see, our unsecured public bonds are trading much tighter versus where we price them.

In connection with our IPO, we instituted a 10b5-1 buyback program.

This program goes into effect shortly and is a programmatic plan.

It's not discretionary and it's not subject to blackout windows.

The plan is administered by Goldman Sachs and starts buying a share of the average daily trading volume below NAV.

The size of the plan is $150 million and is for an initial 18-month term.

We take this buyback plan into consideration when we review our target leverage and liquidity profile.

Thank you all very much for your support and for participating in today's call.

Craig, back to you.

Thanks, Alan.

On the heels of the successful completion of our IPO, we are pleased with our results this quarter and are excited to continue to deliver strong returns for our shareholders.

As Alan noted, we had strong originations this quarter and will continue our work to build the portfolio back towards target leverage while the remaining laser focused on our credit discipline.

In terms of the direct lending market, we continue to see a very competitive market environment, as was the case in Q1, which is in large part due to the strength in most asset classes and especially the public high-yield bond and leverage loan markets.

Therefore we will maintain our cautious approach as we continue to build our portfolio.

We will remain focused as always on evaluating as many transactions as possible in order to identify the right opportunities for our shareholders and continue to be highly selective in our capital allocation.

Our credit approach is focused on the long-term preservation of our shareholders' capital and generating attractive risk-adjusted returns.

And right now we have what we believe to be a conservative bias in the portfolio with over 80% first lien investments and over 98% senior secured investments at quarter end.

To wrap up, the first half of 2019 was very strong for Owl Rock.

We are proud of what we've accomplished but remain steadfast in our focus on maintaining our credit discipline and the overall quality of the portfolio as we look to build on our progress.

We are pleased with the outcome of our IPO process and believe we've given our shareholders meaningful visibility into our returns over the next six quarters through our previously declared special dividends.

On behalf of myself, Alan, and the entire Owl Rock team, I want to close by thanking everyone again for your time today and for your investment in Owl Rock.

We look forward to maintaining an ongoing dialogue and keeping you apprised of our progress.

And with that, operator, please open the line for questions.

(Operator Instructions).

Chris York, JMP Securities.

Good morning, guys.

So first of all, I'll just lead by expressing my congratulations on the successful completion and trading of your IPO, which I think does put you in a real class of BDCs that have performed well out of the gate.

My first question is on leverage.

So, you've communicated a balance sheet leverage ratio target of 0.75 times over the next 2.5 years and don't plan to ask neither the Board nor shareholders for access to additional leverage.

Now this plan is different than other BDCs who are seeking higher leverage.

So, the question is are there any scenarios that could cause you to change this view and ask for additional leverage when you reach your target over the next 12 months?

Sure.

So, we've thought a lot about this as we've evolved and we've continued to share our thinking as things have evolved.

We -- from the beginning we've been focused on maintaining our 0.75 times leverage ratio.

We think -- and first of all, we've been able to generate very attractive returns to our shareholders with that leverage ratio, and so there hasn't been a catalyst to try to increase it.

We very much like having access to the investment-grade bond market.

We obviously just got those ratings over the last 18 months and they are our first bond offering.

And so, we are very cognizant, obviously our leverage target ratio affects our ratings and affects our access to that market and we would be very reluctant to do anything that would jeopardize those.

Obviously leverage ratio has been an evolving topic in the industry and even in the last year or so with the change in the rules and the change in how the rating agencies are looking at things and the changes that some of the other managers have behaved -- there's been an evolution there.

Right now, and this is obvious, we are under levered and we've got a lot of work to do just to get back to our 0.75, and I know you are acknowledging that in your question.

So, for the near-term and foreseeable future we are focused on building the portfolio and getting it back to 0.75 with a focus on credit quality.

To your question, is there a chance that we would ever revisit that -- of course I would never rule that out.

As we approach full leverage we can always take a look at things and decide at the time if there's a scenario where it's beneficial to our shareholders done in a way that is sensitive to the rating agencies, sensitive to our bondholders and overall improves in our cost of capital at that time -- and that time, again, we've said is at least nine to 12 months out, then we would take another look at it.

But that's not something we are pursuing right now.

Got it.

That insight is helpful.

Switching gears a little bit, Craig, as you are aware, there are some direct lending competitors that have expressed caution about your asset growth over the last four years.

Now in our conversations with investors, they're trying to figure out if these comments include some envy about the share you guys have obtained or whether you are taking additional risk to obtain the growth.

So, could you maybe just speak to a couple points about either your underwriting or portfolio today that you think investors should focus on to take comfort about your portfolio quality and then the growth?

Sure.

Look, we recognize as a new entrant and one that is the second-largest publicly traded BDC, for folks that are not sitting through our investment committee or are part of our process, that there would be a question there.

And we understand that and whether it is envy or just lack of knowledge, we appreciate where that might be coming from.

We are really confident that the quality of the portfolio that we are building is extremely high.

And when I say that, I don't mean satisfactorily high.

We think we have one of the highest quality portfolios in the space.

It starts from the kind of companies that we lend to, middle to upper middle market.

We talked here $75 million plus of EBITDA.

These are big companies, they are important.

We think they are well positioned to withstand an economic cycle.

You can see the sectors that we lend to.

They are non-cyclical sectors like food and beverage, healthcare and software.

We do deals that have significant equity sponsored capital beneath us.

Most of our portfolio is sponsor driven.

We've said on the road directionally about 50% of the capital structure in our typical loans is equity.

The portfolio is 80% first lien.

I think that's as high as anyone in the space.

And our performance has been stellar.

We don't have any losses, we have no nonaccruals, we have no defaults.

You can see our categorization.

I'm happy to comment on that, but we think it is in line with other people in the space.

But even more to the point, we're really confident that when I say we have no nonaccruals and no losses, that that's not something we expect to change soon.

So, I think the facts speak for themselves and we feel confident we'll continue to do that.

I'll just make one last comment.

It's not directly answering your question, but we think that the competitive dynamic they were focused on is not so much the other lenders; it is the syndicated market.

Our value proposition is -- the sponsors put up against what they can get in the syndicated market.

So in periods of market volatility our penetration of the overall leverage finance market will go up.

Typically, and I've said this, and for those of you who've heard me say that, if a sponsor has a deep relationship with us and another direct lender, the sponsor typically would like to include both of us in a transaction.

And so, I don't -- I know it not to be the case that we're winning deals at the expense of another good relationship over some aggressive set of economic terms or structural.

We care a lot about covenants, we care a lot about structure.

But we've grown and I would say that's come at the expense of the public leverage finance markets, not so much some of the other platforms, many of which are smaller and not really relevant to the kind of deals that we are doing.

Got it.

The color is very helpful and I think that distinguishment is very important as well.

Last question then I'll jump back in the queue.

Could you provide us some color on the backlog or pipeline quarter to date?

And then you talked a little bit about the repayment visibility maybe decelerating quarter over quarter.

But is there anything in there that you could see in the month of July here like Transperfect for Q3?

Sure.

Look, I'm going to just make some directional comments.

I'm not going to put specific numbers to it.

But directionally we have a very strong pipeline now, not only for deals that have closed already this quarter, but also deals that we are committed to and have pretty significant visibility that we expect to close by the end of the quarter.

So, sitting here right now our activity level, if it were to play out as we expect, would be greater than the second quarter.

Although, of course, deals can fall away at the last minute.

But it's in excess of our second quarter based on our current visibility and we are just here -- late to early August.

In terms of pay downs, I signaled this in my comments.

Sitting here right now, if nothing else changes pay downs would be less than what we experienced in the second quarter.

We don't have a large deal like the Transperfect that we expect to have pay down.

But again, I tried to address this.

We don't have great visibility and that can change quickly.

And so, it's possible that it could be greater by the end of the quarter.

But right now originations running ahead, repayments a bit lower.

Finian O'Shea, Wells Fargo securities.

Congratulations as well on the IPO and inaugural quarter.

I will just ask a couple on allocation.

Craig, you mentioned that you have other platforms vehicles and only a portion of the paper will go into ORCC.

Can you give us some outline on how you treat technology originations given obviously one of your BDCs is dedicated to that strategy?

Is that something ORCC will share with and is there an upper boundary on tech in the Owl Rock portfolio?

Sure.

So, maybe quickly just because some of the phone may not have the context.

I mentioned we manage four funds -- ORCC.

There's a second fund, ORCC II, which is really comparable to ORCC except we are raising that money in the retail channel as opposed to the institutional draw down channel.

But the list of investments in ORCC II is almost identical to ORCC I, the position sizes are just smaller.

We have a third BDC which Fin is referencing which is our tech BDC.

And in the last fund is a senior lending fund, which is only doing true first lien term loans; it's not doing unit tranche or second lean.

So, those are the four funds.

We have a very rigorous allocation policy on how we allocate between the funds.

And I made the comment that I think having all four funds under one roof is very advantageous.

In terms of tech, so any deal that's appropriate for any one of the four funds, a portion of the deal will go into those funds.

And so -- and the denominator, if you will, is essentially available capital.

So, you could think of it just simplistically as a pro rata piece in each of the funds based on available capital.

Obviously each fund's available capital will go up and down over time.

When it comes to tech, I mean the reason we started a tech BDC is we were seeing a significant amount of our deal flow in the tech arena.

And when I say technology I really mean in particular software, software buyouts, it's a very active space for sponsors.

We really like software buyouts.

The credit characteristics are very attractive, extremely low LTV, high recurring revenue, high-margin, so we can talk through all that.

But we did not want to have ORCC inadvertently become over concentrated to software and to tech.

And we characterize deals in ORCC, if it is tech or software we call it tech or software.

I don't know that that is common practice in the industry, but we think that's the right way to do it.

So we started the tech fund in part so we had capacity to do attractive deals that we were seeing, but so that we would avoid having ORCC become too concentrated in technology.

So, when we are doing in particular software unit tranche or software first lien, software second lien you should expect that to go into the tech fund in ORCC and ORCC II, unless it's just a true first lien not in the first lien fund.

Over time as the tech fund is growing and as ORCC is getting more fully invested, the percentage we're going to put in ORCC is going to decline.

We don't have a hard rule on this.

Our biggest sectors stay around 10%.

I think that we would comfortably go above that.

I would say -- don't hold me to this, but directionally 15%-20%, in the ZIP Code, but don't hold me to that, but just so you have some frame of reference.

The last piece I would say is a strategy in the tech BDC, 75% of it is sponsored by out financing essentially.

The other 25% is what we call yield enhanced investing.

This is lending or investing in privately held technology businesses in more structured capital with a higher return but a different risk profile, could be preferred, could be convert, could be some type of structured equity.

Those types of investments we would not expect to put in ORCC.

We don't think it's commiserate with the risk profile of ORCC.

So, investments like that we would expect to just go into the tech fund.

Sorry for a long answer, but wanted to just cover all that at once.

No, thank you for the color.

And then just one more on origination.

You guys outlined in the filings that you may take certain origination or upfront fees.

Can you describe the essence of this practice?

What level of fees will go to the advisor?

And then on what kind of deals -- will these be on the larger deals where you are more competing with the syndicated market or the smaller core middle market deals?

Sure.

So, in certain very specific circumstances, and we've been transparent about this, we do take fees in certain circumstances and it's disclosed in our filings.

Whether we take a fee is driven by whether we are providing certain services to a borrower.

Since structuring a loan we're devising on the capital structure.

And in those cases Owl Rock, the manager, will directly negotiate with the borrower for a separate fee that is paid from the borrower to Owl Rock for those services.

This is separate from upfront fees or OID that the fund would receive in exchange for providing the loan.

So, if you look at our schedule of investments, and I know you've done some math on this -- our math was slightly different but I think basically the same answer.

If you do the calculations you'd see ORCC is receiving on average 1.8% fees.

And any arrangement fees going to Owl Rock, the manager, would be separate from that.

So, what you're seeing in our disclosure is about 1.8%.

And then any fees are negotiated and separate, they directly from the borrower to the manager for services rendered and documented in that manner.

And then we take the OID -- just for completeness, we take the OID that ORCC is getting; we amortize that over the life of the loan.

We're not making a judgment about what type of deal to take it on.

The fee is being given for services that the manager is providing to the borrower.

Mickey Schleien, Ladenburg.

I wanted to start by asking about LIBOR.

Obviously it's down another maybe 5 to 10 basis points this quarter.

So, I'd like to understand how common are LIBOR floors in your typical deal given that you're lending to larger borrowers and many other BDCs?

And what is the average LIBOR floor in the portfolio?

Sure.

So, LIBOR floors are very common in our portfolio and I have to go look at it, but it's north of 85% have LIBOR floors at typically 1%.

We typically have them -- when LIBOR spiked over the last 18 months the syndicated market -- the banks started to take out LIBOR floors for the -- in the syndicated deal.

So, the syndicated market, it's a mix.

We try to insist on it and almost always get it and continue to do so and expect it to be 1% and not more than that.

Obviously we are glad we have them, we want to have them and it is a point of focus on our part because, as you say, we do compete in the syndicated market which occasionally -- which often times will not have it.

By the way, I would expect that to get changed now that leverage is going back down.

I would expect the CLOs and mutual funds to start to push back on that.

So I think that was your question, right?

My next question regarding the outlook for G&A.

Given the IPO in the third quarter, is it reasonable to expect higher G&A at least for one quarter given accruals for the professional fees that were associated with that?

Hey Mickey, it's Alan.

A lot of the IPO expenses go directly through equity.

So, I don't think you're going to see a material change in the other operating expense ratio.

I guided to mid-20s to low 30s.

We are operating at 27 basis point on a trailing 12-month basis.

We are right in the center below the center of the range there.

I don't think you are going to see material movement there.

You're not going to see a pop.

Okay, I understand.

And my last question -- Alan, I appreciate slide 7. I just want to make sure I understand it.

The line with interest -- the fee line of $11.6 million, that's about 2% of the exits for the quarter.

Does that roughly break down to half prepayment fees and half acceleration of OID?

So, that's a great question, Mickey.

It's about a third and two-thirds, give or take, or it's about 40% and 60%.

So, the prepayment fees are about $4.5 million and the accelerated amortization is about 7.

But give or take then prepayments fees are in the neighborhood of 1%, is that fair?

Just in this quarter.

When we underwrite deals we typically will have 1 to 2 points of call premium, and so -- but that is reduced over time.

Oftentimes it might be 102 per year, 101 per year.

And then par, sometimes it is 101 par.

And so, depending upon when the loan gets repaid that will generate what the actual premium is.

In this case it was repaid during the -- where there is call protection.

So, that's why you're seeing it.

Other loans we may be through the call period.

Michael Ramirez, SunTrust.

I guess in your prepared comments you mentioned the leverage loan market remains competitive, which is obviously in line with everybody else in the marketplace.

But you've consistently managed to fund new gross originations at a greater pace than the prior year.

So I guess our question is -- to accomplish this feat are you closing on a higher rate of deals seen?

Or does your size and scale still afford you to look at a majority of the deals in the marketplace to remain selective?

I was trying to follow the front part of your question.

Our commitments this quarter and last quarter were meaningfully lower than they were in the in the third and fourth quarter of last year, although still high.

So, I just want to make sure we are all covering the same thing.

So -- but to get at the spirit of your question, look, we've made a big investment in our team, we have deep relationships and we have a large, flexible pool of capital.

And those are the three reasons why I think we have a terrific competitive advantage.

I still think that we -- our platform is still hitting its stride and we will continue to be a financing source of choice.

There are sponsors that we've worked with a lot and there are some sponsors we haven't had a chance to work with at all.

And we believe when we work with a sponsor they're going to want to work with us again.

Our strategy -- it's simple.

We want to see everything and only do the deals we really like.

And that hasn't changed in any quarter since our inception.

As the pool of capital has grown and as our relationship building has grown, I just think we've been more successful.

I also think that as we've had these other funds, our ability to be in that sweet spot of $200 million to $600 million in underwriting size has really been beneficial.

There are -- particularly in M&A circumstances where a sponsor likes to work with one party that can construct a loan, and we are one of a select few that can do it.

And so, I think that we're -- as I said earlier, I think that the deals we're doing are deals that many lenders just couldn't do, they're too small.

It is not that we are taking it from them, they're too small.

And they are deals that we are essentially taking from the syndicated market that would've otherwise gone in a syndicated deal instead of going direct.

And Transperfect, just to hit on it because that was a deal that any bank would have loved to have underwritten.

We've worked with the client for six months on a highly complicated M&A process, but had a $425 million commitment that we could have outstanding for a long period of time.

And they like being able to work with one financing source.

Okay, great, that was helpful.

And I guess just a quick follow-up on that one.

When you are passing on deals, what are some characteristics you're trying to avoid and how has this changed from the prior year?

No change.

I mean, there's a lot of reasons why we'd say no to a deal.

When we say our hit rate is less than 5% -- I say this somewhat jokingly, but we are turning deals down as fast as we can.

We are saying no to almost everything we look at.

The reasons we say no -- the company too small, company not established enough, the company's market position too weak.

We are very -- we like recession resistant businesses, so we're very cautious on cyclicals, especially at this point in the cycle.

It doesn't mean we wouldn't do cyclicals, but we're not going to be very aggressive on the leverage read.

EBITDA adjustments are a big topic in the market.

We are very diligent about underwriting EBITDA.

And so, we may look at a company we like a lot but have a different view of what the cash flow is and therefore be less competitive from a leverage standpoint.

But I would say at its essence it's really the business that we're being asked to finance more than anything.

We try to do that really efficiently early so we don't waste our time.

I'd also say it tends not to be about the last 25 basis points of rate.

We don't -- although we would prefer to have 25 basis points of rate rather than not, it's hard for us to find companies we really like.

I know we've put a lot of dollars out, but we've said no -- we say no all the time.

When we find a company we really like and think it's going to be a great five- to seven-year investment, 25 basis points upfront is not going to be a driver of our decision-making.

That is helpful and one last one if I may.

Have you guys provided a spillover income number?

I did not in my remarks.

Our undistributed distributions is $0.09 per share and that's inclusive of the IPO shares.

Robert Dodd, Raymond James.

Just digging into portfolio structure, if I can just a little bit more.

Obviously you disclosed 81% of the investments are first lien.

There is a pretty wide range of structures that the docs can call first lien and they are not all the same.

So, can you give us any more color on the breakdown within that 81%?

I mean, what you would have called first lien say five years ago versus what's called first lien today or unit tranche or last out, all of which are technically first lien.

And then within that as well, kind of what is your appetite for maybe shifting that mix or what you're seeing in the market by those broader categories?

I mean, maybe you can't be precise on those categories, but any color would be appreciated.

Sure, and I'm going to use round numbers.

The book is about 80% first lien.

And of that first lien, about 35% is unit tranche and about 45% is what we think of as either true first lien or stretch first lien.

These are terms of [art] on the -- there aren't rigid definitions to it; we are giving you our best judgment based on the risk of the underlying loans.

Unit tranche, simplistically, is where we are going through a leverage level that we are attaching a dollar one, but we might be leveraging to the point that is more commensurate with the second lien investment.

And so, when I say first lien or stretch first lien, we are talking about 35% to 45% loan-to-value and 4 times, 4.5 times leverage.

These are directional.

I'm just trying to give you a sense.

And 20% of the book is second lien.

I don't think -- we generally don't -- I think we have one investment in the portfolio where there is a first out.

So, when I say unit launch, in all cases except one we hold the entire unit tranche and have not sold a first out position.

And so, while the leverage is higher for sure, we are not -- we're attaching a dollar one.

In terms of where might we go from here, look, the 45% first lien and stretch first lien we think is an indicator of a conservatively built portfolio.

And I tried to highlight this on the road show.

I think it partly helps explain how we've successfully invested the kinds of dollars that we've invested in a competitive environment.

We just think we're putting on some sizable, attractive, a little bit lower yielding but very safe first lien term loans.

And that's been deliberate because we wanted to invest our shareholders' money but do it in a way that is safe.

And we've been ramping over the last 3.5 years.

As we approach getting fully invested over the next nine to 12 months, I believe we will have the opportunity to, as some of those loans come off, to rotate some of them into unit tranche or potentially second lien, but only if we like the credits.

Not to generate return, but we will have a bit more flexibility to stay closer to fully invested and wait for the unit tranche we really like when we get closer to fully invested.

I won't put numbers to it, but when we started I would not have expected us to be 45% first lien and stretch first lien.

And I think that we will have some benefit from mix shift.

On second lien, we have been super selective on second lien.

We like second lien.

If it is a credit we like to do upper middle market stable businesses with significant equity cushions for second liens.

If we see opportunities that have those characteristics we will do second liens.

We are really at a low point now and so I would expect that to go up as well, not necessarily in the very immediate term, but over time.

I would say just one last comment, and I don't want to make too big a deal of this.

In the last 30 or 45 days the syndicated market has been a little softer.

Second lien syndications have not gone as smoothly as banks had anticipated.

And so, we are seeing increased inquiry from sponsors wanting to prepay second liens.

And so, we like getting those calls and we will be selective about the ones that we do.

Okay, I really appreciate that color.

Thank you.

And then one sort of also related [to the] portfolio.

Obviously it looks like the Fed may cut rates later today, and the expectation is because obviously growth may be slowing down a little bit.

Have you got any data that you can share with us on EBITDA or [growth] at the underlying portfolio companies, where it is today versus where was say 12 months ago?

Sure.

Look, what we are seeing in our portfolio of companies is very modest growth in revenues and very modest growth in EBITDA, low single-digit growth.

So, we are not seeing a slowing, we're not seeing companies shrinking their revenues, but I would say a modest growth environment and modest EBITDA growth, which is an okay environment for us.

I think you're not necessarily seeing the kind of growth the sponsors would like and what they're making their investment equity -- equity investments on.

But our portfolio is doing well from a growth standpoint.

Casey Alexander, Compass Point.

I think you guys need to be given kudos for the manner in which you handled the IPO and some of the IPO protections that you've put into place.

I am curious with a BDC that has a $5.9 billion market cap, but also really has a $150 billion market cap.

And I'm mindful of the fact that your institution has just put in a quarter of that capital in the most recent capital call.

But at some point in time these lockups are going to come off.

And I think you guys are responsible stewards of capital.

How do you plan to manage the process of expanding the float of the BDC to allow for orderly trading of your institutional pre-IPO clients?

Sure.

Look, we're -- and Alan can comment on this as well.

Look, we are in touch with our large shareholders all the time and have been for 3.5 years.

While this is our first public call, we talk to our large institutional shareholders in this manner consistently throughout.

And we think they are really pleased with their investment in Owl Rock.

And our returns have been terrific.

I'd like to say that we've delivered on what we said we are going to do and continue to do so.

As you noted, we did a number of things in this IPO to make sure the IPO was successful.

We have also done things that benefit our existing shareholders that, candidly, they were not expecting and it was to their benefit.

So I think we continue to treat them extremely well and we expect to have their support for the foreseeable future.

Obviously every investor has to make their own decision.

But obviously this was the game plan from the beginning.

We talked to our investors about an IPO and what that would mean and we expect the vast majority of them to remain shareholders with Owl Rock.

And the float will grow as the lockup comes off just by virtue of the lockup coming off.

Alan and I, as you know, we are not shy about going out on the road and telling the story and we'll continue to do that.

We made a great effort in part of this IPO to expand the universe of folks that invested in BDCs.

I think we were successful at doing that.

And so, we're going to continue to tell our story and hope to have additional shareholders take a look so that there remains great demand for our stock and -- for now and the foreseeable future.

This concludes our question-and-answer session.

I will now turn the call back over to Craig Packer for closing remarks.

Okay.

Look, everyone, thanks for dialing in to our first call.

Thanks for the questions and we look forward to speaking with you again soon.

This concludes today's conference call.

You may now disconnect.

Thank you.