This is an extract from an earlier article at Systematic Income Premium.
In this article we take a look at the Business Development Company Owl Rock Capital Corporation (ORCC). The company has extended its terrific run of performance with a +3.6% total NAV return in Q1. Over the past year the company delivered a +10.2% total NAV return, outperforming the median BDC in our coverage by 4.3% (i.e. 10.2% vs 5.9% median 1Y total NAV return).
Net income rose to $0.45 – a 10% increase from the prior quarter and a new record for the company.
ORCC declared the same base dividend of $0.33 and a formulaic $0.06 special dividend for a total of $0.39. Total dividend coverage stands at 117%. The company’s net income price yield of 13.33% is slightly below the sector average of 13.5%.
The NAV rose by 1.1% – well above the 0.1% median for the sector. The rise was due to both retained income and a mark-up in portfolio holdings from 97% to 97.6%.
Net new investments were slightly up as overall funded activity was very modest. This is a direct function of a low level of repayment activity.
Readers may recall our concern that BDCs were not going to be able to fully take advantage of banks potentially stepping away from corporate lending because an environment of reduced bank lending would also be one of reduced prepayments. So unless BDCs were ready to lift leverage significantly higher they were not going to be in position to fully step into bank shoes. This seems to be playing out, not just for ORCC, but for the broader sector also.
Leverage was not much changed at 1.21x, pretty much in line with the sector median level of 1.19x. Current leverage is close to the top end of the 0.9-1.25x target range which suggests limited further net income upside in this respect.
There were only two names on non-accrual at the end of the quarter, equating to just 0.3% on fair-value – well below the 2.3% median figure in the sector.
Portfolio quality as gauged by internal ratings has been pretty stable.
Stance and Takeaways
Our only two trades involving ORCC were two rotations made into the stock this year, both from BXSL. The chart below shows that both happened when ORCC traded at a valuation in the low 80s.
In terms of valuation differential to the sector, the rotations were done when ORCC traded at discounts of 8% and 7% to the sector average valuation. This valuation differential has since compressed to about 5%.
If we look at the ORCC/BXSL valuation differential, the chart below shows that we rotated from BXSL to ORCC when BXSL traded at around a 15% higher valuation than ORCC, something which looked too wide in our view.
Finally, if we plot total returns from our initial rotation we see that ORCC is ahead by around 8% since then (the total returns are normalized to 100 at the time of the rotation for clarity).
In terms of total NAV returns, BXSL is slightly ahead of ORCC over the past year.
However, ORCC has outperformed for three quarters in a row.
In our view, ORCC is no longer particularly cheap so we view it as a Hold. If its valuation differential opens up to 10% or more below the sector average, we will consider adding to the position.
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