Blue Owl Capital Corporation 2026 Q2 Earnings Call

Mike, please go ahead. Thank you operator, welcome to Blue Owl Capital Corporation's second quarter 2026 earnings.

I'd like to remind listeners that remarks made during today's call may contain forward-looking statements, which are not guarantees of future performance or results and involve a number of risks and uncertainties that are outside of the company's control. Actual results may differ materially from those in forward-looking statements as a result of a number of factors, including those described in OBDC's filings with the SEC. The company assumes no obligation to update any forward-looking statements. We would also like to remind everyone that we'll refer to non-GAAP measures on the call, which are reconciled to GAAP figures in our earnings presentation available on the Events and Presentation section of our website.

Certain information discussed on this call and in the company's earnings materials, including information related to portfolio companies, was derived from third-party sources and has not been independently verified. The company makes no such representations or warranties with respect to this information. Yesterday, OBDC issued its financial results for the second quarter ended June 30th, 2026, reporting adjusted net investment income per share of $0.34 and net asset value per share of $14.26. All materials referenced during today's call, including the earnings press release, earnings presentation, and 10-Q, are available on the News and Events section of OBDC's website. With that, I'll turn the call over to Craig.

Thanks, Mike, good morning everyone. Thanks for joining us. We are very pleased with the quarter and feel good about where things stand for OBDC. We generated quarter-over-quarter NII growth, maintained strong overall credit quality, and increased our financial flexibility during the quarter. In the second quarter, adjusted NII translated into a 9.6% annualized ROE, up over 100 basis points from last quarter, and comfortably covered the dividend. As you'll recall, last quarter we reset the base dividend to better align with the forward earnings power of the portfolio following the impact of lower base rates and tighter spreads. This quarter's results provided a healthy cushion above that level. We also declared a $0.02 per share supplemental dividend in accordance with our framework, allowing shareholders to benefit from incremental earnings above the base dividend. We generated these results while also strengthening our balance sheet.

We ended the quarter with net leverage at 1.11 times, our lowest level in over two years, giving us substantial flexibility to deploy as attractive opportunities emerge. On the financing front, during the quarter, we issued two unsecured bonds and extended the maturity of our revolving credit facility. Together, those actions improved our funding profile and preserved liquidity, allowing us to remain patient as the investment opportunity set develops. Jonathan will cover this in more detail shortly. Turning to net asset value. Our net asset value per share declined modestly quarter-over-quarter, and I want to provide some context on that. The decline was primarily driven by one credit-specific markdown that Logan will address in detail, while the marks across the rest of the portfolio were relatively consistent as spreads were generally stable.

That is an important distinction compared to Q1, when approximately three-quarters of the NAV decline was driven by broad spread widening across the debt portfolio. Modestly offsetting our NAV decline this quarter, we repurchased $35 million of shares, reflecting our continued focus on disciplined capital allocation and conviction in the long-term value of OBDC, while balancing the impact to leverage. Turning to the market environment, the second quarter was much more stable than the first. Earlier this year, credit spreads were volatile and sentiment was more cautious across the market. As the second quarter progressed, we began to see a more normalized backdrop with spreads stabilizing, the rate outlook improving, and sentiment becoming more balanced. Against that backdrop, credit performance across our portfolio remained consistently strong. Borrower fundamentals held up well, and the key credit metrics we track continued to perform in line with our expectations.

Transaction activity was modest as sponsors and borrowers continue to be cautious given the macro uncertainty we saw earlier this year. Refinancing activity has also been more limited as wider spreads have made refinancing less attractive for many borrowers. At the same time, we continue to have constructive dialogue on the transaction front and are seeing activity within our existing portfolio, including add-ons and other opportunities to support borrowers we know well. In this environment, our pipeline remains active, but underwriting discipline continues to take precedence over deployment volume. Financing markets remain open for high-quality borrowers, and our lower leverage and liquidity profile gives us additional flexibility to deploy capital into opportunities that meet our return and credit standards. I'll turn the call over to Logan to provide more details on our investment activity and portfolio performance.

Thanks, Craig. Starting with investment activity, to build off Craig's comments, our transaction activity remains muted in the second quarter. OBDC had fundings of $429 million against $747 million of repayments, resulting in ending net leverage of 1.11 times. Repayments did moderate from recent peaks but remained healthy, which gives us additional flexibility for deployment going forward. It is also worth noting that several of our originations this quarter were the last of the carryovers from commitments made before the recent widening in spreads. As we look ahead, we are being patient and remain focused on opportunities where we believe the risk-adjusted returns reflect the current market environment. Additionally, we had several compelling realizations during the quarter that highlight the strategic value of our existing portfolio.

The most notable was the repayment of our investment in Mavis Tire, which is a strong case study of how we approach structured PIK and junior capital investments to create long-term shareholder value. As we've discussed on prior calls, the vast majority of our PIK exposure was structured that way at inception of the investment, where we saw an opportunity to enhance returns for shareholders. Since our initial preferred equity investment, Mavis has roughly quadrupled in size and become one of the largest tire service companies in the country. This quarter, the company fully repaid our preferred equity investment, and we collected approximately $274 million in cash, including $66 million in accrued PIK interest. This was Blue Owl's largest PIK investment realization to date and generated a 1.5x MOIC.

Following this repayment, our PIK as a percentage of total investment income declined to 10.7% in the second quarter, down from peak levels of over 13% two years ago. This is particularly notable because lower base rates have reduced the cash interest income generated by our floating rate investments, meaning PIK declined meaningfully even as the cash pay denominator was shrinking. We also saw a strong realization within LSI, our life sciences-focused specialty finance vehicle, which generated additional dividend income that contributed to NII this quarter. As mentioned previously, LSI has generated returns of more than 15% to OBDC since inception, underscoring the value of financing innovative life sciences assets through secured loans and royalty streams that complement our core direct lending strategy. Turning to the portfolio, borrower fundamentals remained stable during the quarter.

Revenue and EBITDA continued to grow in the mid to high single digits year-over-year, while liquidity and risk indicators were stable. OBDC remains highly diversified across 30 industries, with an emphasis on large defensive businesses and an average position size of approximately 40 basis points. OBDC's software exposure currently sits at approximately 18% of the portfolio, relatively stable compared to prior quarters. While we are watching software developments carefully, it remains one of our best performing segments, with the strongest revenue and EBITDA growth of any sector. As a reminder, our software investments are primarily first lien senior secured loans to mission critical enterprise software providers with conservative attachment points. More broadly, we remain focused on watching other areas of risk across the market, including commodity price volatility, geopolitical uncertainty, and consumer demand trends.

Based on what we're seeing today, these dynamics have had little impact across the portfolio overall, and we will continue to stay close to our portfolio companies and sponsors where those exposures are more relevant. This environment is yet another good reminder of why we selected defensive industries for our portfolio and proactively avoid sectors such as energy, transportation, building products, and consumer discretionary end markets. Importantly, we have not seen broad-based deterioration in fundamentals of our borrowers. The overall portfolio continues to perform in line with our expectations, and the credit metrics we track remain stable. At the end of the quarter, non-accruals were 0.8% at fair value, slightly down from last quarter and below industry averages, with one name removed and one new addition, which was Loparex.

The company had been pursuing a transformative M&A transaction which would have recapitalized the business with fresh equity, improving the balance sheet and liquidity. The transaction fell apart in the end, which led to the markdown of our position during the quarter. Broadly, the portfolio continues to perform well. Our threes to fives rated names improved slightly as a percentage at fair value, with no meaningful migrations of any high focus names to lower ratings. Interest coverage ratios remained healthy at approximately two times. Revolver draws are at conservative levels, and amendment activity is stable. Portfolio company net leverage averaged 5.8 times, which has modestly declined over the past two years and is at a level we feel comfortable given the fundamental strength of our borrowers. LTVs also remained stable this quarter at 47%, providing ample cushion below our loans in the capital structure.