This is a quick note to let readers know we have placed a new trade in our Blue Harbinger High Income NOW and Income Equity portfolios. Specifically, we have sold 100% of our position in Owl Rock Capital (ORCC) (recently renamed Blue Owl, (OBDC)) and replaced it with this (see below) highly attractive 11.2% yield BDC instead. We’ll be updating our portfolio tracker sheets shortly, but wanted to share this information with readers right away.
Owl Rock: 40 Big-Yield BDCs, Compared
With BDC earnings season set to kick off this week (starting with Ares Capital on Tuesday pre-market), we’ll also be watching Owl Rock closely (set to announce two weeks later). One key metric to watch will be book value as the economy heads towards recession and write-downs could start to more significantly detract from the benefits of rising interest rates. This quick note shares data on 40 big-yield BDC, and digs into Owl Rock in more detail.
Update: 40 Big-Yield BDCs, Silicon Valley Bank Warning
As mentioned in our previous note, BDCs are like banks, only riskier. Not only are BDCs facing increasing stress due to slowing economic growth and increasing interest rates (i.e. the tradeoff between higher floating rate interest payments received and higher default risk on loans), but some BDCs (such as those focused on venture capital) are dramatically over-exposed to fallout from the Silicon Valley Bank mess. In this note, we share updated data on 40 BDCs, and then dive deeper into 4 specific venture-capital-focused BDCs—and how we expect them to fare in light of the SVB mess—buyer beware!
BDCs: Financially Strong, Despite Deteriorating Market
Owl Rock (ORCC) Earnings Note
This big-dividend BDC just raised its quarterly dividend by 6.5% and announced a new supplemental dividend, following its strong Q3 results (shares +8%). Net Investment Income was $0.37 (beating expectations by $0.02) and total Investment Income of $314.05M (+16.7% Y/Y) beating by $21.96M. As per the CEO, the strong results were supported by the “tailwind of rising interest rates.” The board also approved a 2022 Repurchase Program under which the BDC may repurchase up to $150 million of the its common stock. Long.
Fed Rate Hikes To Impact Top Big-Dividend BDCs
With the Fed set to raise interest rates another 75 basis points on Wednesday (following its 2-day open market committee meeting which kicks off today), it’s worthwhile to revisit big-dividend BDC and how they are impacted by rising rates. This note shares data on how many of the most popular publicly-traded BDCs are impacted differently by rising rates depending on the structure of their balance sheets (floating-versus-fixed-rate assets and liabilities, as well as leverage levels). We also highlight a few of our favorite BDCs (two we own and one we are considering) that yield 9.1%, 10.0% and 10.2%, respectively.
Owl Rock’s 9.1% Yield: Credit Spread Risks, Rewards
Business Development Companies, or BDCs, make the loans that big banks generally will not (or cannot, due to regulatory rules). However, like big banks, BDC bottom lines usually come down to simply net interest margins (i.e. the margin between the rate they borrow at and the rate they lend at), assuming they can survive any macroeconomic turmoil, considering they have much higher sensitivity than do the big banks. Interest rates are trending sharply higher (as the Fed fights inflation), and this can be very good (or very bad) for big-dividend BDCs (like Owl Rock). In this report, we share our opinion on whether Owl Rock’s big 9.1% dividend yield is attractive and worth considering, or whether the risks are simply too great and if investors should avoid the shares.
Big-Dividend BDCs: The 5 We Own (Yielding 6.0%, 9.1%, 8.2%, 8.1% and 8.5%)
Business Development Companies, or “BDCs,” basically provide financing (debt and equity) to private companies that are usually a bit too risky for ordinary banks to work with (due especially to stringent post-financial crisis regulatory rules). However, by building a portfolio of these companies, BDCs can reduce risks, and pay income-focused investors the big dividend yields that they love. This report provides an overview of current BDC valuations, and then reviews five of our favorite BDCs, currently yielding 6.0%, 9.1%, 8.2%, 8.1% and 8.5%, respectively.
This 8.5% Yield BDC Is Compelling
The 8.5% yielding BDC we cover in this report is relatively new, but well established and large, and it has a strong balance sheet and ample access to attractive deal flow. Like other BDCs, it faced challenges during the pandemic, but has come through relatively unscathed, and continues to use market dislocation to optimize its portfolio. Importantly, management expects the dividend coverage to improve (including the return of special dividends), going forward. Yet because of nervous near-term and backward-looking investors, it still trades at a discount to NAV. If you are a long-term high-income-focused investor, this one is worth considering.
Owl Rock’s 10% Dividend: Different Than Other BDCs
The negative impacts of COVID-19 have been particularly pronounced for many Business Development Companies (“BDCs”). Owl Rock Capital Corp (ORCC) is one example where the share price has been pushed lower and the dividend yield has mathematically risen to over 10% (over 12.5% if you count the recently declared special dividend). Owl Rock’s strong liquidity position will help it whether the current storm and take on attractive new opportunities once it has addressed the most pressing liquidity needs of its existing portfolio companies. This article reviews the health of Owl Rock’s business, valuation, risks, dividend safety, and concludes with our opinion about why it may be worth considering if you are a long-term income-focused investor.