2023-11-07 17:03:11 ET
Summary
- Blue Owl BDC has benefited from the surge in interest rates, leading to OBDC's relative outperformance against the S&P 500.
- Despite potential uncertainties in the financial health of its portfolio companies, OBDC has outperformed its peers and offers an attractive forward dividend yield.
- Traditional banks are facing structural issues, while BDCs like Blue Owl are seeing increased interest and have a more favorable regulatory environment.
- I assessed that the market has baked in higher execution risks as its NII per share growth cadence slows as the Fed closes in on its peak rates.
- As such, OBDC remains a bargain, as it continues to benefit from the direct lending tailwinds. It looks ready to recover further toward its all-time highs.
Blue Owl Capital Corporation ( OBDC ) is a leading externally-managed business development company or BDC, focusing on middle-market companies. Like its leading peers, Blue Owl BDC has benefited significantly from the surge in interest rates, given the structure of its direct lending portfolio. As such, while it has led to more uncertainties over the financial health of its portfolio companies, the relative outperformance of OBDC against the S&P 500 ( SP500 ) over the past year.
As seen above, OBDC has also outperformed its closest peers, delivering a 1Y total return of about 21%. Despite that, it still boasts an attractive forward dividend yield of approximately 11.6%, providing a substantial buffer against the 2Y ( US2Y ) and 10Y ( US10Y ) Treasury yields, notwithstanding their recent surge. As such, the market is likely satisfied with Blue Owl BDC's ability to overcome the potential peaking in the Fed Fund rates as the FOMC continued its second consecutive "hawkish pause" in early November 2023.
I last updated investors about OBDC in August 2023, urging investors who missed adding it at lower levels to take advantage of its relatively attractive valuation. Its outperformance against its financial sector ( XLF ) peers since the start of 2023 suggests investors have rotated into the leading BDCs as the pace of lending slows in traditional bank lenders.
Even JPMorgan ( JPM ) is reportedly looking for a partner to expand its scope and interests in private credit while it faces structural issues in its core lending space. Investors should know that the traditional banking industry has faced multitudinous headwinds since the regional banking crisis in March 2023. Challenges such as their long-term investment securities portfolio, the strength of their deposit franchise, and the Basel III endgame have led to a confidence crisis in bank investors. As such, bank stocks have struggled to regain their summer highs despite their relatively attractive valuations.
Blue Owl BDC is scheduled to report its third-quarter earnings results on November 8 (post-market). However, investors must be prepared for the potential peaking in its adjusted NII per share as growth slows. Accordingly, Blue Owl BDC is estimated to deliver an adjusted NII per share of $0.47 for Q3, down from Q2's $0.48. Despite that, it's still expected to be up nearly 27% YoY, as the BDC benefited from the surge in interest rates.
Therefore, investors must assess whether the direct lending tailwinds could help provide earnings clarity moving ahead, as growth is expected to be increasingly more challenging. Also, investors need to consider whether they believe the economy could tip into a hard landing or whether they think that a soft landing could still be attained. Given the private deals and more " opaque " nature of their business model, business development companies could take a more significant hit if the market anticipates a hard landing to follow.
However, assessing whether a recession could occur requires a crystal ball, which I believe none of us have. Despite that, if you think the market is forward-looking, we would likely be able to glean the market's expectations from the buying/selling sentiment on OBDC.
As seen above, I assessed pivotal developments from OBDC's price action over the past two months. Its October low ($13) was defended resolutely during the selloff over the past two weeks. As such, it has helped OBDC form a higher low market structure, suggesting that its medium-term uptrend remains intact.
While I gleaned a stiff resistance zone at the $14.50 level, I have confidence that OBDC's continued recovery augurs well for a decisive re-test to potentially breach the zone. As such, it should pave the way for OBDC to continue its upward move toward its early 2022 highs.
Takeaway
The relative outperformance of the leading direct lenders like Blue Owl BDC has likely surprised traditional bank investors. I believe the rotation out of the banks toward the leading BDCs has continued in earnest as investors parsed the structural headwinds in the banking sector.
Furthermore, BDCs aren't expected to face much stiffer regulations like the banks, removing a key impediment toward their earnings clarity. In addition, a resilient US economy has helped provide confidence for BDC investors, given its constructive price action, pointing to a solid medium-term uptrend bias.
As such, while some market participants worry about a hard landing, I certainly have not gleaned one from the robust buying sentiment in OBDC. If the market expects one to occur, I'm pretty sure stocks like OBDC would likely be hammered first. With that in mind, investors should capitalize on OBDC's relatively attractive valuation, constructive price action, and broad private credit tailwinds to add more exposure.
Rating: Maintain Buy.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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For further details see:
Blue Owl BDC: Still A Bargain Despite Its Remarkable Outperformance