Blue Owl Capital Corporation Q3 FY2025 earnings call

• OBDC delivered solid results with adjusted NII per share of $0.36 and ROE of 9.5%, reflecting the strength of the portfolio. Net asset value per share was $14.89, a modest decline from the prior quarter.
• Announced merger between OBDC and OBDC II, which adds scale, strengthens the balance sheet, and is expected to be accretive to NII. OBDC II's portfolio is highly aligned with OBDC, with 98% overlap in investments.
• Portfolio fundamentals remain strong with originations of $1.3 billion, fundings of $1.1 billion, and net leverage at 1.22x. Credit metrics are healthy with a low nonaccrual rate (1.3%), stable amendment activity, and strong borrower fundamentals. PIK income decreased due to refinancings of PIK investments.
• Merger with OBDC II adds $1.7 billion in investments, increasing the portfolio to $18.9 billion, and is expected to yield ~$5 million in cost savings in the first year, with potential for lower cost capital and greater flexibility for new investments.

OBDC generated adjusted NII per share of $0.36 with an ROE of 9.5%. Net asset value per share was $14.89, a modest decline from the prior quarter. The portfolio had $17 billion in assets, with senior secured investments making up 89% of the portfolio. PIK income was down to 9.5% of total investment income from 13.5% a year ago. Originations for the quarter were $1.3 billion with fundings of $1.1 billion, resulting in net leverage of 1.22x at quarter end.

• The merger is expected to be accretive to NII over time.
• Anticipates ~$5 million in cost savings in the first year post-merger.
• Dividend policy will be evaluated in 2026 based on rate expectations and the portfolio's earnings power, with discussions to align dividends with the expected rate environment and portfolio earnings.

• Private credit market headlines causing investor confusion and potential mispricing.
• Potential spread widening in the direct lending market if public loan markets normalize, which could impact returns.
• Uncertainty around tariff impacts on portfolio companies like Conair and Beauty Industry Group, which led to unrealized portfolio depreciation in the quarter.

Q: So starting on the OBDC II merger nonaccruals in this portfolio are 60 basis points above OBDC. So what's driving this? And then what part of that portfolio has underperformed relative to OBDC? And then leverage is clearly lower, but what kind of ROEs has OBDC II generated since inception? And then is there a way just to think about the incremental ROE post the merger?

A: I'll start. Brian, it's Craig. I'll start and then Jonathan can chime in. Look, for those that aren't familiar, OBDC II was raised about a year after we initiated OBDC. The portfolios have almost complete overlap, almost 100%. It's the same names invested in the same period of time with the same economics with the same strategy and the same team. The OBDC II will comprise about 10% of OBDC. So the impact of merging it in is really quite modest given the overlap in names the higher nonaccrual rates are a function of the names on nonaccrual being a little bit bigger, at OBDC II because OBDC II is still operating under a lower leverage constraint than OBDC. It has the old leverage rules. So it's capped at one turn of leverage. We'd be running at 0.75x of leverage. And so we've had the nonaccruals or just a little bit bigger part of that portfolio. But it's the same names that OBDC already has exposure to. When you add them in, it has an immaterial impact on overall credit statistics at OBDC. So their names were already in, slightly higher immaterial impact. I don't know, Jonathan, maybe you want to hit the ROE question.

Q: With respect to what you were discussing in your prepared remarks about base rates declining further as the market expects and earnings and dividends having to be adjusted, I guess, is there a certain level that you would have to be below the current NII? Or is it just once you kind of see the future there, you'll make that adjustment? And then I guess, lastly, what are your expectations for rate cuts over the next 4 or 5 quarters?

A: So on our expectation, look, we don't consider ourselves macro economics with the macro view. We tend to look at the forward curve as the best sense of market sentiment. The market sentiment, and we focus on SOFR. And by the end of next year, that's expected to get to be about 3%. So I think that's our expectation, but that we're really just mimicking the market, and we'll have to see there. The -- in terms of -- look, dividend policy is robust. We look at it every quarter. We discuss it with the Board every quarter. That's not new to this environment. We had those same discussions as rates were going up and -- throughout this period of time. And obviously, we're in a different rate environment. We want to have a base dividend that is sustainable with a rate environment that we -- if we expect the rate environment to stay in a stable place, but rates could move up and down. And so you're constantly evaluating this. We put the supplemental dividend in place when rates went up because we thought that might not be sustainable and the supplemental, I think, worked extremely well. We're going to strive to find the right balance between being very thoughtful on rate moves -- excuse me, dividend moves. We -- the portfolio is performing well. This quarter, our NII was $0.01 -- our dividend was $0.01 above at our NII. We have significant spillover. We've said we're comfortable through the end of the year. We remain comfortable through the end of the year. But as we look to 2026, given how much rates have come down or expected to come down, it's logical for investors to think that we'll evaluate reducing the dividend appropriate with the earnings power in a lower rate environment. So we'll look at it. We have a strong performing portfolio. And our dividend levels for investors who are newer to the stock were lower in a lower rate environment. If you went back to when rates were at 3%, our dividend was about $0.33. So it's -- there are good data points that investors can look to, to try to calibrate where dividends will go. We enjoy the benefit of higher rates, but this -- we think this company is designed to generate a premium return in all rate environments. It's not designed to generate a high level of return when rates are low because of the quality we're investing in, in the market we invest in, the rate -- the investment opportunities fluctuate. The absolute return fluctuates based on where rates are. So I think you can look at where our rates were at a 3% environment at $0.33 and get a sense of the order of magnitude of what we might consider. We're not doing that now. We're not going to do that for the fourth quarter. And we'll have discussions with our Board as 2026 gets underway based on rate expectations at the time to consider what we do with the dividend. But we have a quarter's worth of spillover income. And so that gives us a little bit of cushion, but we're not stubborn about it either. We think that the base dividend level should reflect the earnings power of the portfolio and the expected rate environment for a reasonable period of time. So hopefully, that gives you a little bit of a context of how we think about it.