This is an extract from an earlier article at Systematic Income Premium.
In this postwe take a look at the Business Development Company Blue Owl Capital Corp (OBDC). The company has extended its terrific run of performance with a +3.4% total NAV return in Q2.
OBDC targets borrowers in the upper middle-market space with a weighted-average EBITDA of $186m in the portfolio. Its top sectors are software, insurance, healthcare and others
OBDC trades at an 11.8% yield and a 11% discount to book. Its net income price yield of 14.15% is 0.45% above the sector average.
Quarter Update
Net income rose by over 5% to $0.48. This is below the double-digit pace we saw over the previous three quarters. The stabilization is due primarily to the slowdown in the pace of short-term rate rises – a development we are seeing across the sector.
OBDC declared the same base dividend of $0.33 but hiked the supplemental by a penny to $0.07 for a total dividend of $0.4. The $0.07 supplemental is half of the excess dividend ($0.48 net income less $0.33 base dividend) which is what the company targets to pay out. OBDC also maintains a spillover of $0.19.
Base dividend coverage is a very high 145% while total dividend coverage is 119%.
The NAV rose by 0.7% – well above the sector average level which came in slightly above zero. This is the fourth straight NAV rise by the company – there were only two quarters of negative NAV growth in the post-COVID period.
The rise in the NAV was largely due to retained income. This is the highest NAV level since the company’s IPO in 2019.
By the end of Q2, the company had repurchased a total of $75m shares at a weighted-average price of $12.22, generating small additional NAV returns. There is more capital left for repurchases however management have indicated they are less likely to use it at current valuation levels.
Income Dynamics
Net new investments were negative as repayments exceeded fundings.
As a result leverage ticked lower and remains firmly in the target range of 0.9 – 1.25x.
Portfolio yield ticked up by 0.2% to 12.2% as did interest expense to 5.4%. Net net this is a gain for overall net income as about half of the fund’s total assets are unleveraged. The yield spread of 6.8% is in line with the sector median level.
Management also indicated that while spreads have compressed they remain wider than they were 18-months ago which continues to provide a tailwind to net income.
Valuation and Returns
The company continued its streak of outperformance with a fourth consecutive outperforming quarter.
It has underperformed the sector slightly over the past 3 years but has done exceptionally well over the past year.
The price has tended to trade below the NAV.
From around 2021, OBDC went from trading at a premium to a discount to the sector average valuation. It remains at a discount of around 11% to the sector (89% vs. 100% sector average valuation).
The company’s shift to outperformance alongside a below average valuation makes the stock attractive in our view.
We have been building up our OBDC position since Q1, as soon as we noticed its shift to outperformance and strong portfolio quality. Since then it has done very well but has remained at a sub-par valuation – a good combination to add to the stock. The stock remains Buy-rated in our High Income Portfolio.
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