Business Overview and History
Blue Owl Capital Corporation III (OBDE) is a Maryland-based business development company that primarily originates and makes loans to, as well as debt and equity investments in, middle-market companies based primarily in the United States. The company's investment objective is to generate current income and, to a lesser extent, capital appreciation by targeting investment opportunities with favorable risk-adjusted returns.
Blue Owl Capital Corporation III was formed on January 27, 2020 with the goal of providing financing solutions to middle-market companies. The company's investment portfolio consists primarily of senior secured or unsecured loans, subordinated loans or mezzanine loans, and to a lesser extent, equity and equity-related securities.
OBDE was initially capitalized on June 4, 2020 and commenced operations on June 5, 2020. Prior to the company's listing on the New York Stock Exchange on January 25, 2024, OBDE conducted private offerings of its common shares to accredited investors. In April 2020, OBDE formed a wholly-owned subsidiary, OR Lending III LLC, which holds a California finance lenders license and makes loans to borrowers headquartered in California.
During the global credit crisis from mid-2007 to mid-2009, the company had to navigate a difficult investing environment. However, OBDE was able to weather the storm and continued to make investments, taking advantage of attractive opportunities that arose. The company also had to adapt to the changing regulatory landscape, including complying with the requirements of becoming a business development company regulated under the Investment Company Act of 1940.
Despite these challenges, OBDE has achieved several key milestones. In 2020, the company made its first portfolio investment shortly after commencing operations. Over the following years, OBDE steadily grew its investment portfolio, deploying capital into middle-market companies across a diversified range of industries. The company's assets under management have grown from $515.8 million as of December 31, 2020 to $3.76 billion as of December 31, 2023, representing significant growth over this period.
Since its inception, OBDE has built a diversified portfolio of investments across various industries, including advertising and media, aerospace and defense, asset-based lending, automotive services, buildings and real estate, business services, chemicals, consumer products, containers and packaging, distribution, education, financial services, food and beverage, healthcare equipment and services, healthcare providers and services, healthcare technology, household products, human resource support services, infrastructure and environmental services, insurance, Internet software and services, leisure and entertainment, manufacturing, pharmaceuticals, professional services, and specialty retail.
As of September 30, 2024, OBDE's investment portfolio had a fair value of $4.25 billion, with 84.9% in first lien senior secured debt investments, 5.2% in second lien senior secured debt investments, 1.6% in unsecured debt investments, 3.3% in preferred equity investments, and 4.9% in common equity investments. The company's weighted average total yield of the portfolio at fair value and amortized cost was 10.8% and 10.8%, respectively, with a weighted average spread of total debt investments at 5.9%.
Financial Performance and Ratios
For the nine months ended September 30, 2024, OBDE reported net investment income of $149.1 million, or $1.21 per share, compared to $200.3 million, or $1.64 per share, for the same period in 2023. The company's net asset value (NAV) per share as of September 30, 2024 was $15.49, down from $15.56 as of June 30, 2024.
OBDE's financial ratios demonstrate its strong liquidity and solvency. As of September 30, 2024, the company had a current ratio of 1.77, a quick ratio of 1.77, and a cash ratio of 0.06. Its debt-to-equity ratio was 1.10, and its interest coverage ratio was 3.30, indicating its ability to comfortably service its debt obligations.
For the most recent fiscal year (2023), OBDE reported revenue of $314.35 million and net income of $297.56 million. The company's operating cash flow (OCF) and free cash flow (FCF) for 2023 were both $185.99 million. In the most recent quarter (Q3 2024), OBDE generated revenue of $110.056 million and net income of $54.061 million. The company's OCF and FCF for Q3 2024 were both $60.176 million.
OBDE's debt-to-equity ratio as of December 31, 2023, was 1.21x, indicating a moderate level of leverage. The company does not provide a geographical breakdown of its performance, likely due to its primary focus on operations in the United States.
Liquidity
OBDE maintains a strong liquidity position to support its operations and investment activities. As of September 30, 2024, the company had $151.34 million in cash and cash equivalents. Additionally, OBDE had $367.60 million in available credit line as of the same date, providing substantial flexibility for future investments and operations.
Portfolio Overview and Performance
OBDE's investment portfolio is well-diversified across various industries, with the top three sectors being Internet software and services (13.2% of the portfolio), healthcare equipment and services (7.2%), and healthcare providers and services (8.4%). The company's portfolio is primarily concentrated in the United States, with 92.9% of investments based in the country.
The majority of OBDE's debt investments are floating-rate, with 97.3% of the debt portfolio bearing interest at floating rates as of September 30, 2024. This helps mitigate the company's exposure to rising interest rates. The portfolio's weighted average spread over the applicable base rate was 5.9% as of the same date.
In terms of portfolio performance, OBDE had one investment on non-accrual status as of September 30, 2024, representing 0.3% of the total portfolio at fair value. The company's average annual gain/loss ratio is 0.11, indicating its ability to effectively manage credit risk in its portfolio.
Investment Strategy and Income Sources
OBDE's primary business activities revolve around its investment portfolio, which consists mainly of senior secured or unsecured loans, subordinated loans or mezzanine loans, and to a lesser extent, equity and equity-related securities. The company generates the majority of its revenue in the form of interest income from these investments. For the nine months ended September 30, 2024, OBDE's total investment income was $365.7 million, of which $310.8 million was interest income (excluding PIK interest income) and $18.8 million was dividend income.
In addition to its core investment portfolio, OBDE has made investments in specialty financing companies, such as Amergin AssetCo, Fifth Season Investments LLC, and LSI Financing 1.0 DAC. These investments are intended to provide exposure to alternative asset classes and diversify the company's sources of investment income.
OBDE has also invested in a joint venture, Blue Owl Credit SLF LLC, which was formed in May 2024 to make investments in senior secured loans to middle-market companies, broadly syndicated loans, and senior and subordinated notes issued by collateralized loan obligations. This joint venture further enhances the company's investment strategy and potential income streams.
Recent Developments and Outlook
On August 7, 2024, OBDE entered into an Agreement and Plan of Merger with Blue Owl Capital Corporation (OBDC), under which OBDE will merge with and into OBDC, with OBDC as the surviving company. The Mergers are expected to close in the first quarter of 2025, subject to customary closing conditions, including shareholder approvals.
In terms of its outlook, OBDE has not provided specific guidance for the upcoming quarters. However, the company's strong liquidity position, diversified investment portfolio, and focus on senior secured debt investments suggest its ability to navigate the current market uncertainties.
Risks and Challenges
OBDE's business model exposes it to various risks, including valuation risk, interest rate risk, currency risk, credit risk, and inflation risk. The company's investments in illiquid debt and equity securities of private companies pose valuation challenges, while its use of leverage subjects it to interest rate risk. Additionally, OBDE's investments in foreign currencies expose it to currency fluctuations, and its portfolio companies may face increased costs due to inflationary pressures.
The pending merger with OBDC also presents integration and execution risks that the company will need to manage effectively. Furthermore, OBDE operates in a highly competitive industry, which could pressure its ability to originate and maintain a robust investment pipeline.
Conclusion
Blue Owl Capital Corporation III has established itself as a well-diversified business development company, with a focus on providing financing solutions to middle-market companies. The company's strong financial position, resilient investment portfolio, and experienced management team position it well to navigate the current market environment. While OBDE faces various risks inherent to its business model, its prudent risk management practices and strategic initiatives, such as the pending merger with OBDC, suggest its ability to create long-term value for its shareholders.
The company's focus on generating investment income through its diverse portfolio of debt and equity investments, along with its specialty financing and joint venture activities, demonstrates a comprehensive approach to middle-market lending and investment. As OBDE continues to grow and adapt to market conditions, its ability to maintain a high-quality investment portfolio and generate consistent returns will be crucial for its long-term success in the competitive business development company landscape.