Blue Owl Technology Finance Corp. 2026 Q2 Earnings Call

Good morning, everyone, and welcome to the Blue Owl Technology Finance Corp Q2 2026 earnings call. As a reminder, this call is being recorded. At this time, I'd like to turn the call over to Mike Mosticchio, Head of BDC Investor Relations.

Mike, please go ahead. Thank you, operator, and welcome to Blue Owl Technology Finance Corp's second quarter 2026 earnings conference call.

Joining us on the call today are Craig Packer, Chief Executive Officer, Erik Bissonnette, President, and Jonathan Lamm, Chief Financial Officer. 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 OTF's filings with the SEC. The company assumes no obligation to update any forward-looking statements. We'd also like to remind everyone that we'll refer to non-GAAP measures on this 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, OTF issued its financial results for the second quarter ended June 30th, 2026, reporting adjusted net investment income per share of $0.30 and net asset value per share of $16.48. During the call today, we will be referencing materials, including the earnings press release, earnings presentation, and 10-Q, which are available on the News and Events section of OTF's website. With that, I'll turn the call over to Craig.

Thanks, Mike. Good morning, everyone, and thank you all for joining us today. OTF delivered another strong quarter with stable net asset value, continued earnings growth, and excellent credit quality, including non-accrual rates that remain among the lowest in the industry. This performance was a direct result of the strength and resiliency of our borrowers' underlying fundamentals. Across the portfolio, our borrowers continued to generate steady organic growth in revenues and EBITDA. We are not seeing any material signs of stress in the portfolio today. We continue to support NAV per share through ongoing share repurchase activity, which we believe remains prudent at current trading levels. We also made good progress ramping earnings during the quarter. Adjusted NII increased, supported by continued deployment and growth in net leverage.

Since our direct listing in June 2025, net leverage has increased by four-tenths of a turn and sits just inside the low end of our target range. The investment environment has improved meaningfully, as we continue deploying capital, OTF has a clear path towards dividend coverage by the middle of next year. We have positioned the balance sheet to capitalize on this opportunity set. During the quarter, we strengthened our capital structure by issuing an unsecured bond, adding a secured debt facility, and extending the maturity of our revolving credit facility, all amid a very challenging backdrop for technology-oriented companies. Jonathan will cover this in more detail, but we have substantial liquidity and flexibility to support future portfolio growth. Looking ahead, we have several reasons to be optimistic about OTF's positioning. First, the investing environment is more attractive for technology.

Reduced capital availability has allowed lenders to become more selective, leading to significantly wider spreads and stronger protections. With leverage near the low end of our target range, OTF has ample capacity to deploy capital into compelling opportunities as they emerge. Second, forward rate expectations have moved higher since the beginning of the year, which would provide a meaningful tailwind for our portfolio of predominantly floating-rate loans and expand portfolio yields over time. Third, we believe the market conversation around software has continued to become more balanced. While initial AI concerns were broad-based, investors are increasingly distinguishing between businesses vulnerable to AI disruption and those built around mission-critical platforms with embedded workflows that position them to use AI to strengthen their products and reinforce their competitive advantages.

We are seeing this in the rebound of certain public software categories, including cybersecurity, as well as through partnerships between the AI model companies and established software platforms. This evolution increasingly reflects the characteristics we have long prioritized in our software portfolio and reinforces our conviction in these businesses. Finally, the lockup releases are now behind us. With 100% of OTF's float fully unlocked for trading, we expect the technical selling pressure typical of newly listed stocks to ease over time, creating a clear opportunity to further broaden and diversify our shareholder base. Taken together, these developments improve both the fundamental and technical backdrop for OTF. We remain focused on disciplined execution and believe continued performance across our portfolio will ultimately be reflected in shareholder value. With that, I'll turn it over to Erik.

Thanks, Craig, good morning, everyone. We have continued to make steady progress ramping the portfolio. In the second quarter, we made approximately $850 million of new commitments and funded $550 million. Although primary deal activity stayed subdued, we successfully funded multiple transactions that had been committed to before the recent expansion of market spreads. Looking ahead, a larger share of our new originations will capture today's more attractive pricing, allowing us to steadily realize the benefits of the current market conditions While software activity remains slower, we continue to find differentiated opportunities across other areas of technology where we have deep expertise and strong platform connectivity, including life sciences and digital infrastructure.

Blue Owl is a significant player in digital infrastructure, particularly through our Real Assets platform, which gives us broad visibility into the capital needs supporting data center and GPU buildouts. As major technology companies scale their computing capacity, we see an attractive opportunity to provide debt capital, capture compelling yields, and secure resilient cash flows backed by mission-critical digital assets, often with investment-grade counterparty risk. Another area where we are seeing attractive opportunities is life science, where Blue Owl has built deep sector expertise and a dedicated life sciences credit and royalty team. A recent transaction highlights the benefits of these capabilities.

In the second quarter, Blue Owl led a $700 million platform-wide loan for Caris, a commercial stage company focused on next-generation cancer diagnostics. Life sciences has grown to nearly 2% of the portfolio, and given the strong performance and attractive opportunity set, we look forward to continuing to grow this strategy over time. OTF received approximately $222 million in sales and repayments during the quarter. While repayment activity has been slower given the market environment, we are seeing an increasing number of opportunities to improve economics through our existing portfolio. As high-quality borrowers look to raise additional capital for extended maturities, we are often able to secure wider spreads, enhanced protections, and stronger covenants. This incumbency advantage allows us to stay invested in companies we know well while transitioning our portfolio from legacy low-spread deals to today's more attractive market environment. Turning to the portfolio. Credit quality and borrower health remain sound.

OTF is focused on scaled, sponsor-backed companies, as evidenced by the nearly $300 million weighted average EBITDA of our borrowers. Software exposure represents approximately 70% of the portfolio. Within software, our exposure is concentrated in durable market segments positioned to benefit from further AI integration, typically distinguished by mission-critical applications, embedded workflows, and trusted data. This targeted approach has helped the portfolio to remain resilient to recent market volatility. Our borrowers are generating high single-digit revenue and EBITDA growth, with software generally growing faster than the other areas across Blue Owl's broader direct lending portfolio. Importantly, we have seen minimal signs of material disruption attributable to AI across the broader portfolio. Our internal ratings demonstrated broad stability over the quarter, with our 3 to 5 rated names modestly declining to 7.6% at fair value from 8.5% last quarter.

Amendment activity remains light, and portfolio company revolver utilization remains consistent with historical levels at approximately 10%. Credit quality remains a key differentiator for OTF. Non-accruals remain among the lowest in the industry at just 10 basis points at fair value, even with the addition of one small position during the quarter. We further attribute this performance to the portfolio's conservative construction. As of quarter end, over 80% of the portfolio consisted of senior secured loans, and weighted average LTV remained steady at 40%, with little quarter-over-quarter change. This provides significant equity cushion beneath our debt investments, which we believe has been valuable considering the equity valuation resets across software earlier this year. PIK income declined from 13.1% last quarter to approximately 12.5% of total investment income this quarter, with 7.5% of that coming from PIK interest and 5% from PIK dividends.

Approximately 98% of our PIK was structured at origination rather than introduced through subsequent amendments, which is an important distinction when evaluating the portfolio's credit quality. This is consistent with our view that structured PIK can be a valuable return enhancer for high-quality borrowers reinvesting in growth. These portfolio indicators reinforce what we see firsthand in the market. Our 40-person dedicated technology investing team maintains ongoing dialogue with management teams, sponsors, and industry experts, giving us differentiated real-time insight into how businesses are adapting to AI. Through our observations, one theme has been particularly clear. Sophisticated sponsors are continuing to invest significant resources in AI enablement across their portfolio companies, reaffirming the value of lending to high-quality businesses with the capital and strategic support to evolve through periods of technological change. Looking forward, we remain focused on growing the portfolio toward the midpoint of our target leverage range.