Exploring Blue Owl Capital III as an Alternative in the BDC Landscape

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Written By Jackson Hartwell

Blue Owl Capital III (NYSE) stands as a newly-listed counterpart to the well-established Blue Owl Capital Corporation (OBDC), offering investors an intriguing avenue for diversification within the Business Development Company (BDC) realm.

With both similarities and differentiating factors compared to its sister entity, Blue Owl Capital III (OBDE) warrants a closer examination to discern its potential value proposition in investment portfolios.

Understanding OBDE

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Blue Owl Capital III shares management under Blue Owl Capital, an alternative asset manager, akin to its elder sibling, OBDC. While OBDE’s public listing only dates back to January 2024, its operations reflect a broader track record, focusing on lending to middle-market enterprises across critical sectors such as Internet Software, Insurance, and Healthcare Providers & Services.

Latest Earnings Highlights

OBDE’s Q1 earnings report in May 2024 revealed notable shifts in its financial performance. While net investment income experienced a slight decline due to a one-off exchange listing fee, the company witnessed substantial growth in total investment income and new investment commitments.

Notably, OBDE’s emphasis on first-lien loans fortified its position amidst economic uncertainties, with a robust coverage ratio of 114%.

Similarities & Differences

A comparative analysis between OBDC and OBDE unveils intriguing parallels and distinctions. While OBDC boasts a larger market capitalization and broader portfolio diversification, OBDE’s higher exposure to first-lien loans and superior weighted-average EBITDA for portfolio companies offer a unique defensive edge.

Both entities maintain investment-grade credit ratings, ensuring stability in their balance sheets.

Dividend Considerations

One pivotal aspect influencing investor decisions is the dividend policy. OBDE’s base dividend slightly trails that of OBDC, yet it remains well-supported with a coverage ratio of 114%.

Additionally, OBDE’s declaration of special dividends underscores its commitment to enhancing shareholder returns, further solidifying its appeal within income-focused portfolios.

Balance Sheet Strength

OBDE’s financial robustness is underscored by its investment-grade credit ratings and well-laddered debt maturities, positioning the company favorably amidst market volatilities. With a healthy liquidity profile and a strong interest coverage ratio, OBDE exhibits resilience in navigating evolving economic landscapes.

Valuation Insights

Despite its recent entry into public markets, OBDE presents an intriguing valuation proposition, trading at a slight discount to NAV. This pricing dynamic, coupled with its predominantly floating-rate debt investments, suggests potential resilience amid anticipated interest rate fluctuations.

However, investors should remain vigilant for any signs of share price volatility, particularly considering lingering transfer restrictions.

Risks Assessment

While OBDE’s performance appears promising, inherent risks warrant careful consideration. The company’s reliance on floating-rate loans exposes it to potential NII fluctuations in a changing interest rate environment.

Moreover, prolonged inflationary pressures could heighten non-accrual risks, necessitating proactive risk management strategies.

Compelling Investment

Credits: DepositPhotos

Blue Owl Capital III emerges as a compelling addition to the BDC landscape, offering investors a nuanced blend of stability and growth potential. With a prudent focus on first-lien loans and a resilient dividend policy, OBDE presents a viable alternative for investors seeking income generation and capital appreciation.

While uncertainties persist, OBDE’s solid fundamentals and strategic positioning instill confidence in its long-term value proposition.


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