Key Highlights
- Blue Owl Capital Corporation (OBDC) has fallen 20% below its Net Asset Value (NAV).
- The author argues that OBDC faces significant challenges in maintaining dividend sustainability and growing its portfolio.
- A planned merger with sister BDC Blue Owl Capital II is seen as insufficient to drive positive performance.
- OBDC’s Q3 2025 results show declining NII per share and underfunded dividends, pointing to potential headwinds from lower base rates and spread compression.
Blue Owl Capital: A Bearish Outlook in a Bullish Market
Blue Owl Capital Corporation (OBDC) has seen its stock price fall by 20% below its Net Asset Value (NAV), creating what some investors might perceive as a “once-in-a-decade buying opportunity.” However, Roberts Berzins, CFA, who previously issued a bearish piece on OBDC, argues that the company’s current situation is not favorable for long-term investment. This article delves into why Berzins believes OBDC may underperform and what challenges it faces.
Challenges Facing Blue Owl Capital
Berzins identifies several key issues facing OBDC:
- Negative momentum in BDC performance indicators: In Q3 2025, adjusted Net Interest Income (NII) per share declined by $0.04 compared to the prior quarter, reaching a result of $0.36 per share. This is below OBDC’s quarterly base dividend of $0.37, necessitating borrowing to maintain dividends.
- Declining NAV: The Net Asset Value (NAV) has been declining for five consecutive quarters due to non-accruals and unrealized losses from loan investment markdowns, indicating portfolio quality issues.
Headwinds Affecting OBDC’s Performance
Berzins outlines two major headwinds that could further impact OBDC:
- Base rate decreases and spread compression: With base rates set to decline, a 100 bps decrease in SOFR (Secured Overnight Financing Rate) would result in approximately a 10% decline in NII per share. Additionally, spread compression could negatively affect OBDC’s returns.
- Payment-in-kind (PIK) component: PIK proceeds account for about 15% of total net investment income but are not cash-like items, requiring careful analysis to determine actual dividend coverage on a cash basis.
Merger with Blue Owl Capital II and Its Implications
The planned merger with sister BDC Blue Owl Capital II is seen as insufficient by Berzins. While the merger aims for cost savings, these are minor in relation to OBDC’s overall financial structure:
- Cost savings: The $5 million of annual cost savings based on current income statements account for only 0.05% of the total cost base.
- Leverage dilution: By merging with Blue Owl Capital II, OBDC’s leverage would be positively diluted, but given that the latter has a significantly smaller asset base, this is not expected to provide substantial benefits.
Potential for Further Underperformance and Recommendations
Berzins concludes by emphasizing that OBDC faces multiple pressures with no clear solution in sight:
- No growth potential: With limited debt capacity, underfunded dividends, and a deeply discounted stock price, OBDC lacks tools to combat negative momentum.
- Necessity for adjustment: Berzins suggests that OBDC needs to make necessary adjustments similar to those taken by OCSL and GSBD, including potentially cutting the dividend and providing temporary fee waivers.
In summary, while some investors may see Blue Owl Capital as a buying opportunity due to its current discount, Roberts Berzins argues that the company’s challenges are significant and likely to continue unless it undergoes substantial changes. BDC investors should exercise caution until OBDC provides a sustainable growth path.
