Blue Owl Capital signals $1B expansion through OBDC II merger as portfolio fundamentals remain strong

Earnings Call Insights: Blue Owl Capital Corporation (OBDC) Q3 2025

MANAGEMENT VIEW

* CEO Craig Packer opened the call highlighting the announced merger between OBDC and OBDC II, stating this transaction "can create meaningful value for shareholders of both funds" and that the merger will "add nearly $1 billion in net assets and create a larger, predominantly senior secured portfolio with potential for earnings accretion over time." He emphasized, "Our objective has always been to deliver consistent returns to shareholders," and described Q3 results as reflecting "the ongoing strength and resilience of our portfolio."
* Packer reported, "We generated adjusted NII per share of $0.36, which represents an ROE of 9.5%." He noted the NAV per share at quarter end was $14.89, a modest decline from the prior quarter.
* Packer addressed concerns by stating, "Public market sentiment with respect to BDCs seems to be disconnected from the realities on the ground and we encourage investors to look beyond the headlines and focus on the fundamentals that drive our strong risk-adjusted results over time."
* Senior Managing Director Logan Nicholson explained, "We saw a pickup in deal activity during the third quarter with originations of $1.3 billion and fundings of $1.1 billion, that outpaced $797 million of repayments and resulted in net leverage of 1.22x at the end of the quarter."
* Nicholson highlighted that "approximately 40% of the originations were add-ons, consistent with the past 3 quarters," and that "our average hold size across our platform on new direct lending deals has grown from $200 million in 2021 to roughly $350 million this year."
* Nicholson also stated, "Our nonaccrual rate remains at the low end of the range across the BDC sector and in line with our historical average at 1.3% at fair value this quarter."
* CFO Jonathan Lamm said, "We ended the quarter with total portfolio investments of over $17 billion, total net assets of nearly $8 billion and total outstanding debt of approximately $9.5 billion."
* Lamm added, "As Craig mentioned, we earned adjusted net investment income of $0.36 per share, down from $0.40 as compared to the prior quarter driven primarily by lower nonrecurring income."
* Lamm confirmed the Board declared a fourth quarter base dividend of $0.37, to be paid January 15, 2026, and stated, "In prior quarters, we over-earned our base dividend, allowing the Board to declare supplemental distributions. This quarter, given the lower rate environment over the past year, we did not generate excess earnings to distribute under our dividend policy."
* Lamm detailed, "We finished the quarter with net leverage of 1.22x, up modestly from 1.17x and within our target range of 0.9 to 1.25x as we had net fundings of $273 million."
* Lamm described the merger as "a stock-for-stock merger" and announced a new share repurchase program of up to $200 million, replacing the previous $150 million plan.

OUTLOOK

* Packer stated, "If base rates decline further as the market currently expects our earnings and dividends will adjust as well," while reiterating confidence in the portfolio's credit strength.
* He referenced historical dividend levels, noting, "If you went back to when rates were at 3%, our dividend was about $0.33," as a guide for potential adjustments should rates continue to fall.
* Management expects the OBDC II merger to close in Q1 2026, with Lamm stating, "We expect most of [the synergies] can be achieved in 2026."

FINANCIAL RESULTS

* OBDC reported adjusted net investment income of $0.36 per share for the quarter, with a net asset value per share of $14.89 at quarter end.
* The Board declared a Q4 base dividend of $0.37 per share.
* Total portfolio investments stood at over $17 billion, and net leverage increased to 1.22x.
* Nonrecurring income was $0.02, below the $0.05 in the prior quarter.
* OBDC recorded over $3 billion in total cash and capacity on its facilities.

Q&A

* Brian Mckenna, Citizens JMP: "So starting on the OBDC II merger nonaccruals in this portfolio are 60 basis points above OBDC. So what's driving this?" Packer replied that "the higher nonaccrual rates are a function of the names on nonaccrual being a little bit bigger, at OBDC II," but emphasized the impact is "immaterial" given the overlap in names.
* Arren Cyganovich, Truist: Asked about dividend adjustments if rates decline. Packer responded, "We're going to strive to find the right balance between being very thoughtful on rate moves... We have a strong performing portfolio."
* Robert Dodd, Raymond James: Queried about leverage and deal opportunities amid M&A cycles. Packer said, "The merger will take leverage down a little bit by itself, and so that will create some cushion."
* Casey Alexander, Compass Point: Questioned the $200 million share repurchase program's role post-merger. Packer clarified, "We're not thinking about our buyback as necessarily needed for the closing of that merger because that fact pattern wouldn't suggest that the merger would create more sellers."

SENTIMENT ANALYSIS

* Analysts repeatedly voiced concerns about credit quality, dividend sustainability in a falling rate environment, and market valuation, with a slightly negative tone reflected in questions about nonaccruals, dividend cuts, and stock buybacks.
* Management's sentiment was confident and defensive, using phrases such as "We are confident..." and emphasizing the durability and quality of the portfolio. There was increased caution in discussing earnings outlooks, with references to managing dividends in response to lower rates.
* Compared to the previous quarter, the tone has become more defensive regarding dividends and valuation, with management more frequently fielding questions about shareholder returns and structural changes.

QUARTER-OVER-QUARTER COMPARISON

* Adjusted net investment income per share declined to $0.36 from $0.40, and NAV per share dropped from $15.03 to $14.89.
* The previous quarter saw supplemental dividends; this quarter did not due to lower nonrecurring income and a lower rate environment.
* Management's tone shifted from optimistic about deal flow and diversified strategy to more cautious regarding the impact of rate declines on earnings and dividends.
* Analysts in both quarters focused on dividend policy, leverage, and market valuation, but there was an uptick in questions regarding the sustainability of current returns and structural shareholder value initiatives.
* Strategic focus has shifted toward portfolio consolidation and scale, with the OBDC II merger positioned as a key initiative for future growth and efficiency.

RISKS AND CONCERNS

* Management acknowledged modest increases in nonaccruals, specifically referencing Beauty Industry Group and Conair, with Nicholson noting, "Conair... has tariff-related weakness and tariff-related issues affecting the business."
* There are ongoing concerns about the impact of tariffs, tighter spreads, and rate declines on earnings and portfolio returns.
* Packer highlighted that "spreads have tightened in the direct lending market" and rates have dropped, reducing earnings power.
* Analysts expressed concern over OBDC's stock trading below book value and questioned management's approach to buybacks and insider purchases.
* No changes are planned to the management fee structure despite lower rates and tighter spreads.
* Liquidity remains robust, with over $3 billion in cash and capacity, and no near-term maturities.

FINAL TAKEAWAY

OBDC's third quarter call centered on the announced merger with OBDC II, expected to add nearly $1 billion in net assets, bolster portfolio scale, and generate operating efficiencies. Management underscored the portfolio's resilience and quality, highlighted by stable credit metrics, disciplined underwriting, and a focus on senior secured lending. While earnings and dividends are expected to adjust if rates continue to decline, the company remains confident in its ability to deliver attractive risk-adjusted returns and long-term shareholder value as a market leader in direct lending.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/obdc/earnings/transcripts]

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