Blue Owl Capital Corporation President Logan Nicholson said another 100-basis-point rate rise would leave its U.S. middle-market borrowers with 1.8 times interest coverage, a gauge of debt-service capacity.
On the Nov. 5 earnings call, Nicholson put coverage at about two times. The lower estimate assumes other conditions remain unchanged. It would still exceed the portfolio’s 1.6-times trough in 2023 and 2024, when the Secured Overnight Financing Rate (SOFR) was above 5%, he said.
The estimate concerns Blue Owl’s portfolio of U.S. middle-market loans. The company is a business development company that provides direct lending to those businesses. Its third-quarter results showed adjusted net investment income of $0.33 per share, compared with a $0.31 base dividend.
Blue Owl said no new portfolio-company issuers entered nonaccrual status during the quarter. On the earnings call, management also reported an additional tranche tied to a borrower already in nonaccrual status.
Higher rates may increase income for Blue Owl as floating-rate loans reset, while raising debt-service costs for borrowers. Chief Financial Officer Jonathan Lamm estimated that a 100-basis-point increase would add about $0.02 per share to quarterly earnings, all else equal. He said 95% of the company’s debt investments have floating rates. CEO Craig Packer described the effect of higher borrower costs as manageable, a management assessment.
Lamm said the effect of the September rate increase was expected to start appearing in fourth-quarter results as loans reset. The 1.8-times coverage figure is a scenario estimate from Nicholson, not a report of coverage after a rate increase.
