Blue Owl Capital Corp (OBDC) Q2 2026 Earnings Call Transcript

Good morning, everyone, and welcome to Blue Owl Capital Corporation's Second Quarter 26 Earnings Call. A reminder, this call is being recorded. This time, I would like to turn the call over to Michael Mosticchio, Head of BDC Investor Relations. Mike? Please go ahead.

Thank you, operator, and welcome to Blue Owl Capital Corporation's Second Quarter 26 Earnings Conference Call. I would 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 will refer to non-GAAP measures on the call, which are reconciled to GAAP figures in our earnings presentation available on the Events and Presentations 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 06/30/2026, 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 will turn the call over to Craig.

Thanks, Mike, and 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 will 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 1.11x, 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. 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 where 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, 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 continue 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. Now I will turn the call over to Logan to provide more details on our investment activity and portfolio performance.

Thanks, Craig. Starting with investment activity and to build off Craig's comments, our transaction activity remained muted in the second quarter. OBDC had fundings of $429 million against $747 million of repayments, resulting in ending net leverage of 1.11x. 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 have 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-paid 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 over 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-plus industries, with an emphasis on large, defensive businesses, and an average position size of 40 basis points. OBDC's software exposure currently sits at 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 are seeing today, these dynamics have had little impact across the portfolio. Overall, 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 why we selected defensive industries for our portfolio and proactively avoid sectors such as energy, transportation, building products, consumer discretionary and some 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. However, 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 3-rated to 5-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 2x, revolver draws are at conservative levels, and amendment activity is stable. Portfolio company net leverage averaged 5.8x, which has modestly declined over the past two years and is at a level we feel comfortable with 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. To close, credit trends remain consistent with the disciplined underwriting standards that have characterized the portfolio over time. Credit metrics are healthy, and the issues we are managing remain isolated. With portfolio leverage at its lowest level in over two years, the continued sourcing advantages of the Blue Owl platform give us flexibility to lean in as the opportunity set improves. Now I will turn it over to Jonathan to review the financial results.

Thank you, Logan. In the second quarter, OBDC earned adjusted NII of $0.34 per share, up from $0.31 last quarter. The increase was driven primarily by elevated non-recurring income from the realization of Mavis as well as higher dividend income from LSI. As a result, base dividend coverage for the quarter was 110%. More broadly, the rate environment has stabilized and the lagged impact of last year's rate cuts is now fully reflected in our portfolio yields. At the same time, funding costs have continued to trend modestly higher as lower-coupon legacy unsecured notes mature and are refinanced at current market rates. That said, this dynamic is consistent with our expectations, and we continue to feel good about the portfolio's earnings potential going forward. Last quarter, we reset the dividend to $0.31 per share in line with expectations on the earnings power of the portfolio, and we remain confident in its sustainability. The Board declared a third quarter base dividend of $0.31 per share which will be paid on October 15 to shareholders of record as of September 30. We also declared a $0.02 per share supplemental dividend in accordance with our framework, and we will continue to do so as incremental earnings above the base dividend allow. The supplemental dividend will be paid on September 15 to shareholders of record as of August 31. Our dividend is also supported by a healthy level of spillover income at approximately $0.29 per share, which provides a meaningful cushion in support of the base dividend. Moving to the balance sheet: second quarter NAV per share was $14.26, down from $14.41 last quarter. As Craig and Logan outlined, the decline was driven primarily by a write-down on a specific credit and was partially offset by over-earning the dividend and continued share repurchase activity. In the second quarter, we repurchased $35 million of stock which was accretive to NAV per share by $0.03. Since Q4 of last year, we have repurchased approximately $220 million in total, reflecting our conviction in OBDC's long-term value while maintaining capacity to deploy capital as the opportunity set improves. We ended the quarter with net leverage of 1.11x, within our target range of 0.9 to 1.25 times, which was lower quarter over quarter. This was driven by repayments exceeding new deployment during the quarter, and our lower leverage positions us well for future opportunities. Turning to our capital structure, we remained active during the quarter, raising approximately $800 million of unsecured debt against approximately $1 billion of legacy maturities that we successfully addressed in July. We also amended and extended our revolver, maintaining the facility size with $4 billion of capacity and leaving pricing unchanged. Notably, every bank in the facility extended as part of the transaction, which we view as a strong endorsement of our credit profile by our banking partners. In addition, we eliminated two higher cost secured facilities as part of our ongoing efforts to reduce costs and optimize our capital structure. Taking into account the July bond maturity, total liquidity, including cash and undrawn capacity on our credit facilities, remains robust at $3.5 billion, comfortably exceeding our unfunded commitments. Our diversified funding mix and staggered maturity schedule provide capacity to fund existing commitments and address upcoming maturities. Overall, we are pleased with our results and continued progress to optimize our capital structure with the support from our banking partners, positioning us well to deploy selectively as opportunities arise. Now I will turn it over to Craig for some closing remarks.

Thanks, Jonathan. Want to close with a few thoughts on where we stand and how we are thinking about the environment ahead. First, we believe OBDC continues to be in a strong position. Leverage is low, the balance sheet is strong, and the portfolio remains focused on lending to large, high-quality borrowers on a senior secured basis. Second, the credit picture remains healthy. As Logan highlighted, operating trends remain stable, risk migration has been limited, and we are actively managing the small number of individual situations that require attention. Third, we are increasingly optimistic about the opportunity set ahead. While the deal environment this year has been muted, I would encourage a longer-term view. We have lots of investing opportunities across new deals sourced from our platform but also in support of our existing portfolio companies. The investment backdrop has improved meaningfully from where we started the year. The forward rate curve is now roughly 100 basis points higher. Spreads remain wider and financing terms have become more attractive, all of which create a more constructive environment for a scaled direct lender with available capital. We are seeing the same consistency across Blue Owl's broader direct lending platform. Credit performance remained strong, non-accruals across the platform are low at 1% of cost. Realized losses remain limited and borrower fundamentals continue to track in line with our expectations. Since inception, our platform loss rate has been just 12 basis points, underscoring the durability of our underwriting approach across cycles. That consistency matters. Investors are increasingly focused on manager selection and we believe credit performance, portfolio quality, and disciplined capital allocation are the characteristics that will separate managers over time. In closing, we believe OBDC combines resilient credit performance, ample financial flexibility, and the discipline to selectively capitalize on improving market opportunities. Those attributes have defined our platform over time and we believe they position us to continue creating long-term value for shareholders. Thank you for your time today. We will now open the line for questions.

Thank you. We will now be conducting a question and answer session. Our first question today is coming from Arren Saul Cyganovich from Truist Securities. Your line is now live.

Thanks. I apologize if this was said in prepared remarks. I hopped on a tad late. The fee income was quite elevated this quarter, and I was wondering, given that interest income was somewhat low, is this something we can infer was driven by amendments in the portfolio? What were those fees related to?

Sure. Yes, we mentioned we had effectively a repayment on one of our larger positions, Mavis, that Logan referred to in the scripted remarks, which resulted in higher-than-normal fee income.

Versus prior quarters where we were probably lower than our average run rate over the course of the last couple of years. So it was Mavis-driven. You should — Arren, you hopped on late — you should take a listen. It is a really terrific outcome on a very large PIK preferred that got refinanced and generated $0.03 a share of fee income. It was the single largest PIK repayment we have had in our history. So it is notable from a credit standpoint and also from an earnings standpoint.

Okay. And is that typical where that would end up in the fee line versus the interest income line?

It was effectively going back to the company, so it did not go into the interest line. It goes into the fee line because of the way it ultimately came out. It was a preferred instrument as well, so not typical relative to some of the other prepayments that you will see on a debt instrument.

Okay. And then I heard you mention LSI providing some higher income for the quarter and it looked like there were a handful of other specialty finance-type investments that also increased dividends for the quarter. Anything in particular driving that? Is this something that is somewhat repeatable, or would we expect that dividend income level to pull back a little?

Yes, it is Logan. Broader base dividend increases at the rest of the joint ventures and specialty equity investments, away from LSI, was just continued maturation of those JVs and optimization. So I would view those as more normal run rates. At LSI in particular, we had a nice realization — a repayment of a business called ITM Radiopharma, which was a refinancing with call protection and was over a 20% IRR for us on that specific investment at LSI. So it was a great result on a $140 million position within that vehicle. So it was also notably a repayment and a good outcome in LSI that drove that one-time boost to LSI.

But the equity investments and joint ventures that we have that generate dividends — those dividends are a function of very diversified underlying portfolios that kick off significant interest income and other forms of dividends that are being paid out. They are recurring. We continue to invest into these entities. They have generated strong ROI for OBDC. As we add to them, directionally the dividends that come out of those underlying portfolios will grow over time because there are very large pools of diversified investments in each that generate income. That is very different than the Mavis outcome. Mavis was a single investment that got repaid. But, of course, every quarter we get investments that repay; it is the nature of our business that every quarter we will get a couple cents of repayment or fee income from those activities. Mavis was a notably large one, but every quarter we get some.

Great. Appreciate all the color. Thank you.

Thank you. Our next question today is coming from Robert James Dodd from Raymond James. Your line is now live.

Hi guys and congratulations on the quarter. I want to sort of ask about Mavis, but not really Mavis. Obviously a great outcome on that asset. I would say I do not think that would constitute necessarily a halo asset like heavy asset, low obsolescence, but it seems a lot closer to that than it is a tech asset. In terms of mix, with such a good outcome there, should we expect more of those kinds of assets in the portfolio going forward? Yes, it has got PIK, but PIK is not all bad. It seems like the kind of industry that is much more defensible versus the AI worries out there. Are you seeing more of those kinds of things in the pipeline and increasing optimism for the second half, or was it just a one-off and a great one-off?

Sure, Robert. Let me try to split that into two different ways. Mavis as an investment, as we highlighted in the script, has been a really terrific one. It is a large tire retailer. We have been backing it for a number of years and it has grown considerably. They repaid our preferred and we got a terrific return for our investors. We thought it was important to highlight Mavis beyond the income that it generated because it was a PIK investment. We and others in the industry have said the vast majority of our PIK investing was done intentionally, for reasons that generated good returns. When we get repaid on a sizable investment, we hope folks will look back and acknowledge that is consistent with why we do PIK and how we do PIK. In terms of the AI and software part of your question, OBDC has about 18% software exposure. There are others with higher percentages of software. We are going to continue to be cautious around software as we have discussed on previous calls. The picture improved this quarter versus last quarter, but it is an area that moves quickly, and we will continue to be cautious about deployment in software. The other 82% of the portfolio is not software. Mavis fits nicely in that portion and is consistent with our theme since inception: large businesses with predictable recurring revenue and cash flow in most economic environments. Tire retailing fits that description; it is a business that does well in almost any economic environment and is our bread and butter. Regarding the outlook, the deal environment is pretty modest. You are seeing this from other managers who have reported — private equity activity has been very modest and a disappointment for lenders and PE firms in the first half of this year. Geopolitical issues have slowed activity. I think the pipeline is steady enough to allow us to continue to invest at a regular pace, but I hope at some point it becomes more robust. You need more stabilization in the broader environment and PE valuations to come in line with expected exits for that to really pick up. We continue to see a steady beat of activity, but it remains modest.

Got it. Thank you. That answered my follow-up as well. Appreciate it.

Thank you. Our next question is coming from Jason Stewart from Compass Point. Your line is now live.

Hey, good morning and thank you for taking my question. This is Dylan Ritter filling in for Jason Stewart. Our question is how are you thinking about the balance between buybacks versus leverage and new originations? And then as a follow-up, with the stock trading between say 75-80% of book in the quarter, is there a discount threshold where you would perhaps be more aggressive on repurchases? Or is $35 million the number that you are targeting? Thanks.

It is Jonathan. We approach capital allocation to pursue the very best investment. Over the last couple of quarters, we have been buying stock back pretty consistently alongside bringing leverage down a tick and you should expect us to continue to do the same. We evaluate repurchases based on where the stock is trading. The stock has been attractive for us to be in the market. You should expect us to continue monitoring our liquidity, our leverage, and the best incremental investment opportunity when making repurchase decisions.

Got it. Thank you.

Thank you. Next question is coming from Erik Zwick from Zwick Capital Markets. Your line is now live.

Thank you. Good morning, guys. You may have touched on this a little bit earlier, but wanted a little more detail or clarification with regard to commitments and fundings in 2Q — those were relatively low compared to past quarters. Can you characterize whether the lower activity was more a reflection of market activity, the quality of deals that did not meet your standards, or some other factors? Then, we are a little more than a month into 3Q — how are things shaping up this quarter from a production standpoint?

Sure. Erik, thanks for the question. If you look at the quarter it was really a slowdown in two areas, both related to asset price volatility and spread widening. First, refinancing activity slowed dramatically. In prior quarters last year, as much as 50% or even 75% in any given quarter came from refinancing or extension activity from existing portfolio companies. In a spread-widening environment like this, that activity grinds to a halt. Second, M&A pullback has occurred given geopolitical volatility and commodity price uncertainty. So new deal flow is also slow. Two months into the current quarter, we are not seeing a dramatic uptick in M&A activity and spreads are still a touch wider than six or nine months ago, so the refinancing activity is not picking up dramatically either. Activity remains muted. We are optimistic and hope that it picks up; there are quite a few people that want to transact, but right now the activity remains slow as Craig mentioned.

Thank you for the commentary. That is all for me today.

Thank you. Next question is coming from Kenneth Lee from RBC Capital Markets. Your line is now live.

Hey, good morning and thanks for taking my question. Following up on the leverage, you delevered a bit this quarter. Should we expect OBDC to continue delevering? Have you changed your stance from previously when you articulated a more cautious stance on leverage?

No. We are comfortable operating inside of our target leverage range, which is 0.9 to 1.25. We have been able to, and continue to, repurchase stock while managing leverage, which brought leverage down a tick. We are happy operating anywhere in that range. You should expect to see us around that as a good home base; I would not expect drastic movements from here.

Gotcha. That is helpful. One follow-up: is deal activity mainly still focused on the upper end of the middle market? Have you considered diversifying across other segments?

Yes. We are still focused on the upper middle market and larger scale companies. We continue to see larger and larger companies each year come to direct lending. We see a lot of smaller deals as well, but we continue to find what we think are the best credits at the upper end of the market. No change there; I do not see a dramatic difference in activity levels across the spectrum.

I will add that we have a very broad funnel and cover hundreds of financial sponsors as well as privately held companies in all sectors. But we find the best risk-adjusted return continues to be in the upper middle market. We will occasionally finance more traditional middle-market companies if they are attractive and attractively priced, but our credit bar is very high and the returns we seek are better in the upper middle market.

Got it. Very helpful. Thanks again.

Thank you. Our next question is coming from Christopher Muller from Citizens Capital. Your line is now live.

Hey guys, thanks for taking the questions and nice to be on with you this morning. I wanted to touch on the risk ratings a little. It looks like 5-rated loans jumped in the quarter but 4-rated loans decreased by about two times that. Is the right way to think about that that the 4-rated loan drop was split into negative and positive migration?

I think that is correct. I believe it is just the migration of Loparex, our non-accrual, as it moved down the spectrum at fair value and decreased as we marked it lower. It was really just that one name; we did not see a lot of other movement in the portfolio away from that one non-accrual.

Got it. My follow-up: the cost basis of non-accruals jumped a little but the fair value basis declined. Was that the same one credit that drove that divergence?

Yes. Exactly right. It was about a 90 basis point position at cost with very little value at the current mark at fair value. Really just that one position driving those two numbers.

Appreciate you taking the questions and congrats on a solid quarter. Thank you.

Thank you. Next question is coming from Christopher Nolan from Ladenburg Thalmann. Your line is now live.

Hi, thanks for taking my questions. Any consideration on a management fee waiver? Your base management fee is 150 basis points and given activity in terms of the dividend reset, wanted to see whether a waiver was in consideration.

Christopher, thanks for the question. Our fees have been the same throughout our existence as a BDC, and no, that is not something we have discussed nor do we think warrants discussion.

Okay. I also noticed there were no repurchases in July. Are repurchases typically back-ended or just opportunistic?

Our repurchase program is executed in open windows. We do not have a 10b5-1 program. You will see us repurchasing during the windows when we are not in a blackout period. July is a period of time where you are finalizing the Q2 NAV, so that is a period of time when the window closes.

Finally, on Mavis, was it in fee income because it was PIK?

No. It was the structure of how it was bought back by the company.

Great. Thank you.

Thank you. Next question today is coming from Paul Conrad Johnson from KBW. Your line is now live.

Hey, good morning. Thanks for taking my questions. I have one: institutional demand seems fairly strong for private credit. Is selling assets from OBDC or the BDCs to institutions still something under consideration? Do you find interest there at all?

We generally hold our investments to maturity. We do not actively look to sell our portfolio; we like our portfolio and generally hold it until we get repaid. Occasionally we will do a sale for a tactical reason, but it is not an active part of our strategy. We did a sizable sale earlier this year at an attractive price and would not rule anything out, but it is not a regular part of our process. Institutional appetite for private credit remains high; despite some headlines, institutional investors like these assets given the floating-rate nature and strong performance. They are attractive and many investors like buying them.

Understood. Thank you very much. That is all for me.

Thank you. Next question is coming from Patrick Davitt from Autonomous Research. Your line is now live.

Hey, good morning everyone. Thanks for letting me join. Just one question: one of your biggest competitors is suggesting a much better shadow pipeline in the upper middle market than it seems you are. What do you think might be driving that disconnect in tone? In that vein, do you have any concern that you guys are missing out on new deployment looks that others are seeing for some reason?

I have no concern that we are missing out. In our 10-year history we have been one of the most prolific originators of private credit and have deep relationships with financial sponsors. We have a significant pool of available capital today — $10 billion-plus — that we would like to deploy. Our funds have capacity and many of our vehicles are looking for opportunities. We engage with private equity firms on a daily basis and would like to think we see everything that is out there. Our credit bar remains high. Most in the industry are acknowledging this is a generally slow deal environment and I think that is consistent with what we are seeing. I hope it picks up. I do think the syndicated market is quite strong, so some deals that might have gone to direct lenders are being syndicated. That tends to be somewhat cyclical. But I do not have concerns that we are missing anything.

Okay. Thanks.

We reached the end of our question and answer session. I would like to turn the floor back over for any further closing comments.

Thank you all for joining. We were really pleased with the quarter. Hopefully everyone will have a chance to take a look at our results. If you have any questions, we are always available for follow-up questions and eager to engage with our shareholders. With that, hope everyone has a terrific day.

That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.