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EX-32.2 - EX-32.2 - Owl Rock Capital Corp IIorccii-ex322_11.htm
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EX-31.2 - EX-31.2 - Owl Rock Capital Corp IIorccii-ex312_10.htm
EX-31.1 - EX-31.1 - Owl Rock Capital Corp IIorccii-ex311_9.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to            

Commission File Number: 814-01219

 

OWL ROCK CAPITAL CORPORATION II

(Exact Name of Registrant as Specified in its Charter)

 

 

Maryland

 

47-5416332

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

245 Park Avenue, 41st Floor

New York, New York

 

10167

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (212) 419-3000

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a small reporting company)

  

Small reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of November 7, 2017, the registrant had 5,632,459 shares of common stock, $0.01 par value per share, outstanding.

 

 

 

 


 

Table of Contents

 

 

 

 

 

Page

PART I.

 

CONSOLIDATED FINANCIAL INFORMATION

 

 

Item 1.

 

Consolidated Financial Statements

 

3

 

 

Consolidated Statements of Assets and Liabilities as of September 30, 2017 (Unaudited) and December 31, 2016

 

3

 

 

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 (Unaudited)

 

4

 

 

Consolidated Schedule of Investments as of September 30, 2017 (Unaudited)

 

5

 

 

Consolidated Statement of Changes in Net Assets for the Nine Months Ended September 30, 2017 (Unaudited)

 

7

 

 

Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2017 (Unaudited)

 

8

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

9

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

29

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

48

Item 4.

 

Controls and Procedures

 

49

PART II.

 

OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

50

Item 1A.

 

Risk Factors

 

50

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

50

Item 3.

 

Defaults Upon Senior Securities

 

50

Item 4.

 

Mine Safety Disclosures

 

50

Item 5.

 

Other Information

 

50

Item 6.

 

Exhibits

 

51

Signatures

 

52

 

 

 

i


 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements that involve substantial risks and uncertainties. Such statements involve known and unknown risks, uncertainties and other factors and undue reliance should not be placed thereon. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about Owl Rock Capital Corporation II (the “Company,” “Owl Rock,” “we” or “our”), our current and prospective portfolio investments, our industry, our beliefs and opinions, and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” “continue,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” “targets,” “projects,” “outlook,” “potential,” “predicts” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:

 

an economic downturn could impair our portfolio companies’ ability to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies;

 

an economic downturn could disproportionately impact the companies that we intend to target for investment, potentially causing us to experience a decrease in investment opportunities and diminished demand for capital from these companies;

 

an economic downturn could also impact availability and pricing of our financing;

 

a contraction of available credit and/or an inability to access the equity markets could impair our lending and investment activities;

 

interest rate volatility could adversely affect our results, particularly if we elect to use leverage as part of our investment strategy;

 

currency fluctuations could adversely affect the results of our investments in foreign companies, particularly to the extent that we receive payments denominated in foreign currency rather than U.S. dollars;

 

our future operating results;

 

our business prospects and the prospects of our portfolio companies;

 

our contractual arrangements and relationships with third parties;

 

the ability of our portfolio companies to achieve their objectives;

 

competition with other entities and our affiliates for investment opportunities;

 

the speculative and illiquid nature of our investments;

 

the use of borrowed money to finance a portion of our investments as well as any estimates regarding potential use of leverage;

 

the adequacy of our financing sources and working capital;

 

the loss of key personnel;

 

the timing of cash flows, if any, from the operations of our portfolio companies;

 

the ability of Owl Rock Capital Advisors LLC (the “Adviser”) to locate suitable investments for us and to monitor and administer our investments;

 

the ability of the Adviser to attract and retain highly talented professionals;

 

our ability to qualify for and maintain our tax treatment as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), and as a business development company (“BDC”);

 

the effect of legal, tax and regulatory changes; and

 

other risks, uncertainties and other factors previously identified in the reports and other documents we have filed with the Securities and Exchange Commission (“SEC”).

Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this report should not be regarded as a representation by us that our plans and objectives will be achieved. These forward-looking statements apply only as of the date of this report. Moreover, we assume no duty and do not undertake to update the forward-looking statements. Because we are an investment company, the forward-looking statements and projections contained in this report are excluded from the safe harbor protection provided by Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “1940 Act”).

2


 

PART I. CONSOLIDATED FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Owl Rock Capital Corporation II

Consolidated Statements of Assets and Liabilities

(Amounts in thousands, except share and per share amounts)

 

 

 

 

September 30, 2017

(Unaudited)

 

 

December 31, 2016

 

Assets

 

 

 

 

 

 

 

 

Investments at fair value (amortized cost of $34,804 and $0, respectively)

 

$

34,813

 

 

$

 

Cash and cash equivalents

 

 

14,628

 

 

 

1

 

Due from Adviser

 

 

671

 

 

 

 

Interest receivable

 

 

128

 

 

 

 

Prepaid expenses and other assets

 

 

174

 

 

 

 

Total Assets

 

$

50,414

 

 

$

1

 

Liabilities

 

 

 

 

 

 

 

 

Debt

 

 

10,000

 

 

 

 

Management fee payable

 

 

147

 

 

 

 

Accrued performance based incentive fees

 

 

3

 

 

 

 

Accrued expenses and other liabilities

 

 

609

 

 

 

 

Total Liabilities

 

 

10,759

 

 

 

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

Net Assets

 

 

 

 

 

 

 

 

Common shares $0.01 par value, 300,000,000 shares authorized; 4,386,860 and 100 shares issued and outstanding, respectively

 

 

44

 

 

 

0

 

Additional paid-in-capital

 

 

39,602

 

 

 

1

 

Net unrealized gain (loss) on investments

 

 

9

 

 

 

 

Total Net Assets

 

 

39,655

 

 

 

1

 

Total Liabilities and Net Assets

 

$

50,414

 

 

$

1

 

Net Asset Value Per Share

 

$

9.04

 

 

$

9.00

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 


3


 

Owl Rock Capital Corporation II

Consolidated Statements of Operations

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

 

September 30, 2017

 

 

September 30, 2017

 

Investment Income

 

 

 

 

 

 

 

 

Investment income from non-controlled, non-affiliated investments:

 

 

 

 

 

 

 

 

Interest income

 

$

519

 

 

$

661

 

Other income

 

 

3

 

 

 

9

 

Total investment income from non-controlled, non-affiliated investments

 

 

522

 

 

 

670

 

Total Investment Income

 

 

522

 

 

 

670

 

Operating Expenses

 

 

 

 

 

 

 

 

Initial organization

 

 

328

 

 

 

602

 

Interest expense

 

 

13

 

 

 

30

 

Management fee

 

 

112

 

 

 

147

 

Performance based incentive fees

 

 

3

 

 

 

3

 

Professional fees

 

 

345

 

 

 

688

 

Directors' fees

 

 

49

 

 

 

134

 

Other general and administrative

 

 

215

 

 

 

551

 

Total Operating Expenses

 

 

1,065

 

 

 

2,155

 

Expense Support

 

 

(1,023

)

 

 

(2,084

)

Net Operating Expenses

 

 

42

 

 

 

71

 

Net Investment Income (Loss)

 

$

480

 

 

$

599

 

Net Realized and Unrealized Gain (Loss) on Investments

 

 

 

 

 

 

 

 

Net unrealized gain (loss):

 

 

 

 

 

 

 

 

Non-controlled, non-affiliated investments

 

$

15

 

 

$

9

 

Total Net Unrealized Gain (Loss)

 

 

15

 

 

 

9

 

Net realized gain (loss):

 

 

 

 

 

 

 

 

Non-controlled, non-affiliated investments

 

 

 

 

 

5

 

Total Net Realized Gain (Loss)

 

 

 

 

 

5

 

Total Net Realized and Unrealized Gain (Loss)

 

 

15

 

 

 

14

 

Net Increase (Decrease) in Net Assets Resulting from Operations

 

$

495

 

 

$

613

 

Earnings Per Share - Basic and Diluted

 

$

0.17

 

 

$

0.32

 

Weighted Average Shares Outstanding - Basic and Diluted

 

 

2,988,198

 

 

 

1,906,894

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

4


 

Owl Rock Capital Corporation II

Consolidated Schedule of Investments as of September 30, 2017

(Amounts in thousands)

(Unaudited)

Company(1)(2)(3)(5)

 

Investment

 

Interest

 

Maturity Date

 

Principal / Par

 

 

Amortized Cost(4)

 

 

Fair Value

 

 

Percentage of Net Assets

 

 

Debt Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Buildings and real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DTZ U.S. Borrower, LLC (dba Cushman & Wakefield)(7)

 

Second lien senior secured loan

 

L + 7.75%

 

11/4/2022

 

$

4,000

 

 

$

3,962

 

 

$

3,980

 

 

 

10.0

 

%

Business services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CIBT Global, Inc(7)

 

Second lien senior secured loan

 

L + 7.75%

 

6/1/2025

 

 

1,000

 

 

 

976

 

 

 

980

 

 

 

2.5

 

%

GC Agile Holdings Limited (dba Apex Fund Services)(7)(11)

 

First lien senior secured loan

 

L + 6.50%

 

8/29/2023

 

 

1,397

 

 

 

1,370

 

 

 

1,369

 

 

 

3.4

 

%

GC Agile Holdings Limited (dba Apex Fund Services)(8)(9)(10)(11)

 

First lien senior secured multi draw term loan

 

L + 6.50%

 

8/29/2019

 

 

 

 

 

(6

)

 

 

(6

)

 

 

 

%

GC Agile Holdings Limited (dba Apex Fund Services)(8)(9)(11)

 

First lien senior secured revolving loan

 

L + 6.50%

 

8/29/2023

 

 

 

 

 

(1

)

 

 

(1

)

 

 

 

%

 

 

 

 

 

 

 

 

 

2,397

 

 

 

2,339

 

 

 

2,342

 

 

 

5.9

 

 

Consumer products

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Feradyne Outdoors, LLC(7)

 

First lien senior secured loan

 

L + 6.25%

 

5/25/2023

 

 

998

 

 

 

986

 

 

 

985

 

 

 

2.5

 

%

Distribution

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dade Paper & Bag, LLC (dba Imperial-Dade)(6)

 

First lien senior secured loan

 

L + 7.50%

 

6/9/2024

 

 

3,990

 

 

 

3,913

 

 

 

3,910

 

 

 

9.9

 

%

Energy equipment & services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liberty Oilfield Services LLC(6)

 

First lien senior secured loan

 

L + 7.63%

 

9/19/2022

 

 

1,750

 

 

 

1,716

 

 

 

1,715

 

 

 

4.3

 

%

Healthcare equipment and services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Geodigm Corporation (dba National Dentex)(7)(12)

 

First lien senior secured loan

 

L + 6.54%

 

12/1/2021

 

 

885

 

 

 

877

 

 

 

876

 

 

 

2.2

 

%

Geodigm Corporation (dba National Dentex)(8)(10)(12)

 

First lien senior secured delayed draw term loan

 

L + 6.54%

 

10/13/2017

 

 

 

 

 

 

 

 

 

 

 

 

%

PetVet Care Centers, LLC(7)

 

First lien senior secured loan

 

L + 6.00%

 

6/8/2023

 

 

638

 

 

 

632

 

 

 

632

 

 

 

1.6

 

%

PetVet Care Centers, LLC(7)(8)

 

First lien senior secured revolving loan

 

L + 6.00%

 

6/8/2023

 

 

17

 

 

 

16

 

 

 

16

 

 

 

 

%

PetVet Care Centers, LLC(7)(8)(10)

 

First lien senior secured delayed draw term loan

 

L + 6.00%

 

6/8/2019

 

 

133

 

 

 

130

 

 

 

130

 

 

 

0.3

 

%

 

 

 

 

 

 

 

 

 

1,673

 

 

 

1,655

 

 

 

1,654

 

 

 

4.1

 

 

Household products

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hayward Industries, Inc.(6)

 

Second lien senior secured loan

 

L + 8.25%

 

8/4/2025

 

 

6,500

 

 

 

6,372

 

 

 

6,370

 

 

 

16.1

 

%

Human resource support services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SABA Software, Inc.(6)

 

First lien senior secured loan

 

L + 5.50%

 

5/1/2023

 

 

449

 

 

 

444

 

 

 

445

 

 

 

1.1

 

%

SABA Software, Inc.(8)(9)

 

First lien senior secured revolving loan

 

L + 5.50%

 

5/1/2023

 

 

 

 

 

(1

)

 

 

 

 

 

 

%

 

 

 

 

 

 

 

 

 

449

 

 

 

443

 

 

 

445

 

 

 

1.1

 

 

Internet software and services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trader Interactive, LLC (fka Dominion Web Solutions, LLC)(6)

 

First lien senior secured loan

 

L + 6.25%

 

6/17/2024

 

 

940

 

 

 

926

 

 

 

926

 

 

 

2.3

 

%

Trader Interactive, LLC (fka Dominion Web Solutions, LLC)(8)(9)

 

First lien senior secured revolving loan

 

L + 6.25%

 

6/15/2023

 

 

 

 

 

(1

)

 

 

(1

)

 

 

 

%

 

 

 

 

 

 

 

 

 

940

 

 

 

925

 

 

 

925

 

 

 

2.3

 

 

5


 

Company(1)(2)(3)(5)

 

Investment

 

Interest

 

Maturity Date

 

Principal / Par

 

 

Amortized Cost(4)

 

 

Fair Value

 

 

Percentage of Net Assets

 

 

Leisure and entertainment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troon Golf, L.L.C.(7)(12)(13)

 

First lien senior secured term loan A and B

 

L + 6.38%

(TLA: L + 3.5%; TLB: L + 7.1%)

 

9/29/2023

 

 

5,926

 

 

 

5,838

 

 

 

5,838

 

 

 

14.7

 

%

Troon Golf, L.L.C.(8)(9)

 

First lien senior secured revolving loan

 

L + 6.38%

 

9/29/2023

 

 

 

 

 

(9

)

 

 

(9

)

 

 

 

%

 

 

 

 

 

 

 

 

 

5,926

 

 

 

5,829

 

 

 

5,829

 

 

 

14.7

 

 

Manufacturing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Blount International Inc.(6)

 

First lien senior secured loan

 

L + 5.00%

 

4/12/2023

 

 

499

 

 

 

499

 

 

 

499

 

 

 

1.3

 

%

Ideal Tridon Holdings, Inc.(7)

 

First lien senior secured loan

 

L + 6.50%

 

7/31/2023

 

 

1,568

 

 

 

1,537

 

 

 

1,536

 

 

 

3.9

 

%

Ideal Tridon Holdings, Inc.(7)(8)

 

First lien senior secured revolving loan

 

L + 6.50%

 

7/31/2022

 

 

51

 

 

 

48

 

 

 

48

 

 

 

0.1

 

%

Pexco LLC (dba Spectrum Plastic Group)(7)

 

Second lien senior secured loan

 

L + 8.00%

 

5/8/2025

 

 

3,000

 

 

 

2,974

 

 

 

2,970

 

 

 

7.5

 

%

 

 

 

 

 

 

 

 

 

5,118

 

 

 

5,058

 

 

 

5,053

 

 

 

12.8

 

 

Transportation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lytx, Inc.(6)

 

First lien senior secured loan

 

L + 6.75%

 

8/31/2023

 

 

1,658

 

 

 

1,609

 

 

 

1,608

 

 

 

4.1

 

%

Lytx, Inc.(8)(9)

 

First lien senior secured revolving loan

 

L + 6.75%

 

8/31/2022

 

 

 

 

 

(3

)

 

 

(3

)

 

 

 

%

 

 

 

 

 

 

 

 

 

1,658

 

 

 

1,606

 

 

 

1,605

 

 

 

4.1

 

 

Total Debt Investments

 

 

 

 

 

 

 

$

35,399

 

 

$

34,804

 

 

$

34,813

 

 

 

87.8

 

%

Total Investments

 

 

 

 

 

 

 

$

35,399

 

 

$

34,804

 

 

$

34,813

 

 

 

87.8

 

%

________________

 

 

(1)

Certain portfolio company investments are subject to contractual restrictions on sales.

 

(2)

Unless otherwise indicated, all investments are non-controlled, non-affiliated investments.  Non-controlled, non-affiliated investments are defined as investments in which the Company owns less than 5% of the portfolio company’s outstanding voting securities and does not have the power to exercise control over the management or policies of such portfolio company.

 

(3)

Unless otherwise indicated, all investments are considered Level 3 investments.

 

(4)

The amortized cost represents the original cost adjusted for the amortization of discounts and premiums, as applicable, on debt investments using the effective interest method.

 

(5)

Unless otherwise indicated, loan contains a variable rate structure, subject to an interest rate floor. Variable rate loans bear interest at a rate that may be determined by reference to either the London Interbank Offered Rate (“LIBOR” or “L”) (which can include one-, two-, three- or six-month LIBOR) or an alternate base rate (which can include the Federal Funds Effective Rate or the Prime Rate), at the borrower’s option, and which reset periodically based on the terms of the loan agreement.

 

(6)

The interest rate on these loans is subject to the greater of a LIBOR floor or 1 month LIBOR, which as of September 30, 2017 was 1.23%.

 

(7)

The interest rate on these loans is subject to the greater of a LIBOR floor or 3 month LIBOR, which as of September 30, 2017 was 1.33%.

 

(8)

Position or portion thereof is an unfunded loan commitment. See Note 7 “Commitments and Contingencies”.

 

(9)

The negative cost is the result of the capitalized discount being greater than the principal amount outstanding on the loan. The negative fair value is the result of the capitalized discount on the loan.

 

(10)

The date disclosed represents the commitment period of the unfunded term loan. Upon expiration of the commitment period, the funded portion of the term loan may be subject to a longer maturity date.

 

(11)

This portfolio company is not a qualifying asset under Section 55(a) of the 1940 Act. Under the 1940 Act, the Company may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of total assets.

 

(12)

The Company may be entitled to receive additional interest as a result of an arrangement with other lenders in the syndication.

 

(13)

The first lien term loan is comprised of two components: Term Loan A and Term Loan B. The Company's Term Loan A and Term Loan B principal amounts are $1.1 million and $4.8 million, respectively. Both Term Loan A and Term Loan B have the same maturity date. Interest disclosed reflects the blended rate of the first lien term loan. The Term Loan A represents a ‘first out’ tranche and the Term Loan B represents a ‘last out’ tranche. The ‘first out’ tranche has priority as to the ‘last out’ tranche with respect to payments of principal, interest and any amounts due thereunder.

 

The accompanying notes are an integral part of these consolidated financial statements.


6


 

Owl Rock Capital Corporation II

Consolidated Statement of Changes in Net Assets

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 

 

 

For the Nine Months Ended

 

 

 

September 30, 2017

 

Increase in Net Assets Resulting from Operations

 

 

 

 

Net investment income (loss)

 

$

599

 

Net unrealized gain (loss) on investments

 

 

9

 

Net realized gain (loss) on investments

 

 

5

 

Net Increase in Net Assets Resulting from Operations

 

 

613

 

Distributions

 

 

 

 

Net investment income

 

 

(599

)

Net realized gains

 

 

(5

)

Net Decrease in Net Assets Resulting from Shareholders' Distributions

 

 

(604

)

Capital Share Transactions

 

 

 

 

Issuance of shares of common stock

 

 

39,524

 

Reinvestment of shareholders' distributions

 

 

121

 

Net Increase in Net Assets Resulting from Capital Share Transactions

 

 

39,645

 

Total Increase in Net Assets

 

 

39,654

 

Net Assets at Beginning of Period

 

 

1

 

Net Assets at End of Period

 

$

39,655

 

Undistributed Net Investment Income (Loss) Included in Net Assets at the End of the Period

 

$

 

 

The accompanying notes are an integral part of these consolidated financial statements.


7


 

Owl Rock Capital Corporation II

Consolidated Statement of Cash Flows

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 

 

 

For the Nine Months Ended

 

 

 

September 30, 2017

 

Cash Flows from Operating Activities

 

 

 

 

Net Increase (Decrease) in Net Assets Resulting from Operations

 

$

613

 

Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities:

 

 

 

 

Purchases of investments, net

 

 

(35,852

)

Net change in unrealized gain (loss) on investments

 

 

(9

)

Proceeds from sales of investments

 

 

1,066

 

Net realized (gain) loss

 

 

(5

)

Net amortization of discount on investments

 

 

(13

)

Changes in operating assets and liabilities:

 

 

 

 

(Increase) decrease in Due from Adviser

 

 

(671

)

(Increase) decrease in interest receivable

 

 

(128

)

(Increase) decrease in prepaid expenses and other assets

 

 

(174

)

Increase (decrease) in management fee payable

 

 

147

 

Increase (decrease) in performance based incentive fees

 

 

3

 

Increase (decrease) in accrued expenses and other liabilities

 

 

609

 

Net cash used in operating activities

 

 

(34,414

)

Cash Flows from Financing Activities

 

 

 

 

Borrowings on Promissory Note

 

 

26,500

 

Repayments of Promissory Note

 

 

(16,500

)

Proceeds from issuance of common shares

 

 

39,524

 

Distributions paid to shareholders

 

 

(483

)

Net cash provided by financing activities

 

 

49,041

 

Net increase in cash and cash equivalents

 

 

14,627

 

Cash and cash equivalents, beginning of period

 

 

1

 

Cash and cash equivalents, end of period

 

$

14,628

 

 

 

 

 

 

Supplemental and Non-Cash Information

 

 

 

 

Interest paid during the period

 

$

10

 

Distributions declared during the period

 

$

(604

)

Reinvestment of distributions during the period

 

$

121

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

8


 

Owl Rock Capital Corporation II

Notes to Consolidated Financial Statements (Unaudited)

Note 1. Organization and Principal Business

 

Owl Rock Capital Corporation II (“Owl Rock” or the “Company”) is a Maryland corporation formed on October 15, 2015. The Company’s investment objective is to generate current income, and to a lesser extent, capital appreciation by targeting investment opportunities with favorable risk-adjusted returns. The Company’s investment strategy focuses primarily on originating and making loans to, and making debt and equity investments in, U.S. middle market companies. The Company may invest in senior secured or unsecured loans, subordinated loans or mezzanine loans and, to a lesser extent, equity-related securities which includes common and preferred stock, securities convertible into common stock, and warrants. The Company defines “middle market companies” to generally mean companies with earnings before interest expense, income tax expense, depreciation and amortization, or “EBITDA,” between $10 million and $250 million annually and/or annual revenue of $50 million to $2.5 billion at the time of investment. The Company may on occasion invest in smaller or larger companies if an attractive opportunity presents itself, especially when there are dislocations in the capital markets, including the high yield and large syndicated loan markets. Once the Company raises sufficient capital, the target credit investments will typically have maturities between three and ten years and generally range in size between $10 million and $125 million, although the investment size will vary with the size of our capital base. Prior to raising sufficient capital, the Company may make a greater number of investments in syndicated loan opportunities than it otherwise would expect to make in the future.

 

The Company has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, the Company intends to elect to be treated for U.S. federal income tax purposes, and to qualify annually, as a regulated investment company (“RIC”), as defined under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). Because the Company has elected to be regulated as a BDC and intends to qualify as a RIC under the Code, the Company’s portfolio is subject to diversification and other requirements.

 

On March 15, 2017, the Company formed a wholly-owned subsidiary, OR Lending II LLC, a Delaware limited liability company, which holds a Tennessee industrial loan and thrift certificate.

 

The Company is managed by Owl Rock Capital Advisors LLC (the “Adviser”). The Adviser is registered with the Securities and Exchange Commission (“SEC”) as an investment adviser under the Investment Advisers Act of 1940 (the “Advisers Act”). Subject to the overall supervision of the Company’s Board of Directors (the “Board”), the Adviser manages the day-to-day operations of, and provides investment advisory and management services to, the Company.

 

On September 30, 2016, the Adviser purchased 100 shares of the Company’s common stock at $9.00 per share, which represents the initial public offering price of $9.47 per share, net of combined upfront selling commissions and dealer manager fees. The Adviser will not tender these shares for repurchase as long as the Adviser remains the investment adviser of the Company. There is no current intention for the Adviser to discontinue in its role. On April 4, 2017, the Company received subscription agreements totaling $10.0 million for the purchase of shares of its common stock from a private placement from certain individuals and entities affiliated with the Adviser and met its minimum offering requirement of $2.5 million. The purchase price of the shares was $9.00 per share, which represents the initial public offering of $9.47 per share, net of the selling commission and dealer manager fees. In April 2017, the Company made its first portfolio company investment.

 

The Board expects to contemplate a liquidity event for its shareholders three to four years after the completion of the offering. The Company will consider the offering period to be complete as of the termination date of the most recent public equity offering if the Company has not conducted a public equity offering in any continuous two year period. A liquidity event could include: (i) a listing of shares on a national securities exchange; (ii) a merger or another transaction approved by the Board in which shareholders will receive cash or shares of a publicly traded company; or (iii) a sale of all or substantially all of its assets either on a complete portfolio basis or individually followed by a liquidation to the Company and distribution of cash to its shareholders. A liquidity event may include a sale, merger or rollover transaction with one or more affiliated investment companies managed by the Adviser.  A liquidity event involving a merger or sale of all or substantially all of the Company’s assets would require the approval of its shareholders in accordance with the Company’s charter. Certain types of liquidity events, such as one involving a listing of shares on a national securities exchange, would allow the Company to retain its investment portfolio intact. If the Company determines to list securities on a national securities exchange, the Company expects to, although is not required to, maintain its external management structure. If the Company has not consummated a liquidity event by the five-year anniversary of the completion of the offering, the Board will consider (subject to any necessary Shareholder approvals and applicable requirements of the 1940 Act) liquidating the Company and distributing cash to its shareholders, and dissolving the Company in an orderly manner. The Board, as part of its ongoing duties, will review and evaluate any potential liquidity events and options as they become available and their favorability given current market conditions; however, there is no assurance that a liquidity event will be completed at any particular time or at all.

9


Owl Rock Capital Corporation II

Notes to Consolidated Financial Statements (Unaudited) – Continued

 

Note 2. Significant Accounting Policies

 

Basis of Presentation

 

The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Company is an investment company and, therefore, applies the specialized accounting and reporting guidance in Accounting Standards Codification (“ASC”) Topic 946, Financial Services – Investment Companies. In the opinion of management, all adjustments considered necessary for the fair presentation of the consolidated financial statements for interim periods, have been included. The Company commenced operations on April 4, 2017, and therefore comparative financial statements are not presented. The Company’s fiscal year ends on December 31.

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual amounts could differ from those estimates and such differences could be material.

 

Cash

 

Cash consists of deposits held at a custodian bank. Cash is carried at cost, which approximates fair value. The Company deposits its cash with highly-rated banking corporations and, at times, may exceed the insured limits under applicable law.

 

Investments at Fair Value

 

Investment transactions are recorded on the trade date. Realized gains or losses are measured by the difference between the net proceeds received and the amortized cost basis of the investment using the specific identification method without regard to unrealized gains or losses previously recognized, and include investments charged off during the period, net of recoveries. The net change in unrealized gains or losses primarily reflects the change in investment values, including the reversal of previously recorded unrealized gains or losses with respect to investments realized during the period.

 

Investments for which market quotations are readily available are typically valued at the bid price of those market quotations. To validate market quotations, the Company utilizes a number of factors to determine if the quotations are representative of fair value, including the source and number of the quotations. Debt and equity securities that are not publicly traded or whose market prices are not readily available, as is the case for substantially all of the Company’s investments, are valued at fair value as determined in good faith by the Board, based on, among other things, the input of the Adviser, the Company’s audit committee, and independent third-party valuation firm(s) engaged at the direction of the Board.

 

As part of the valuation process, the Board takes into account relevant factors in determining the fair value of the Company’s investments, including: the estimated enterprise value of a portfolio company (i.e., the total fair value of the portfolio company’s debt and equity), the nature and realizable value of any collateral, the portfolio company’s ability to make payments based on its earnings and cash flow, the markets in which the portfolio company does business, a comparison of the portfolio company’s securities to any similar publicly traded securities, and overall changes in the interest rate environment and the credit markets that may affect the price at which similar investments may be made in the future. When an external event such as a purchase or sale transaction, public offering or subsequent equity sale occurs, the Board considers whether the pricing indicated by the external event corroborates its valuation.

 

The Board undertakes a multi-step valuation process, which includes, among other procedures, the following:

 

 

With respect to investments for which market quotations are readily available, those investments will typically be valued at the bid price of those market quotations;

 

With respect to investments for which market quotations are not readily available, the valuation process begins with the independent valuation firm(s) providing a preliminary valuation of each investment to the Adviser’s valuation committee;

 

Preliminary valuation conclusions are documented and discussed with the Adviser’s valuation committee. Agreed upon valuation recommendations are presented to the Audit Committee;

10


Owl Rock Capital Corporation II

Notes to Consolidated Financial Statements (Unaudited) – Continued

 

 

The Audit Committee reviews the valuation recommendations and recommends values for each investment to the Board; and

 

The Board reviews the recommended valuations and determines the fair value of each investment.

 

The Company conducts this valuation process on a quarterly basis.

 

The Company applies Financial Accounting Standards Board Accounting Standards Codification 820, Fair Value Measurements (“ASC 820”), as amended, which establishes a framework for measuring fair value in accordance with U.S. GAAP and required disclosures of fair value measurements. ASC 820 determines fair value to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date.  Market participants are defined as buyers and sellers in the principal or most advantageous market (which may be a hypothetical market) that are independent, knowledgeable, and willing and able to transact.  In accordance with ASC 820, the Company considers its principal market to be the market that has the greatest volume and level of activity. ASC 820 specifies a fair value hierarchy that prioritizes and ranks the level of observability of inputs used in determination of fair value. In accordance with ASC 820, these levels are summarized below:

 

 

Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

 

Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

 

Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

 

Transfers between levels, if any, are recognized at the beginning of the quarter in which the transfer occurs. In addition to using the above inputs in investment valuations, the Company applies the valuation policy approved by its Board that is consistent with ASC 820.  Consistent with the valuation policy, the Company evaluates the source of the inputs, including any markets in which its investments are trading (or any markets in which securities with similar attributes are trading), in determining fair value. When an investment is valued based on prices provided by reputable dealers or pricing services (that is, broker quotes), the Company subjects those prices to various criteria in making the determination as to whether a particular investment would qualify for treatment as a Level 2 or Level 3 investment. For example, the Company, or the independent valuation firm(s), reviews pricing support provided by dealers or pricing services in order to determine if observable market information is being used, versus unobservable inputs.

 

Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may fluctuate from period to period. Additionally, the fair value of such investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that may ultimately be realized. Further, such investments are generally less liquid than publicly traded securities and may be subject to contractual and other restrictions on resale. If the Company were required to liquidate a portfolio investment in a forced or liquidation sale, it could realize amounts that are different from the amounts presented and such differences could be material.

 

In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the unrealized gains or losses reflected herein.

 

Interest and Dividend Income Recognition

 

Interest income is recorded on the accrual basis and includes amortization of discounts or premiums. Discounts and premiums to par value on securities purchased are amortized into interest income over the contractual life of the respective security using the effective yield method.  The amortized cost of investments represents the original cost adjusted for the amortization of discounts or premiums, if any. Upon prepayment of a loan or debt security, any prepayment premiums, unamortized upfront loan origination fees and unamortized discounts are recorded as interest income in the current period. Upon prepayment of a loan or debt security, any prepayment premiums, unamortized upfront loan origination fees, and unamortized discounts are recorded as interest income in the current period.

 

Loans are generally placed on non-accrual status when there is reasonable doubt that principal or interest will be collected in full. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid current and, in management’s judgment, are likely to

11


Owl Rock Capital Corporation II

Notes to Consolidated Financial Statements (Unaudited) – Continued

 

remain current. Management may make exceptions to this treatment and determine to not place a loan on non-accrual status if the loan has sufficient collateral value and is in the process of collection.

 

Dividend income on preferred equity securities is recorded on the accrual basis to the extent that such amounts are payable by the portfolio company and are expected to be collected. Dividend income on common equity securities is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly-traded portfolio companies.

 

Other Income

 

From time to time, the Company may receive fees for services provided to portfolio companies. These fees are generally only available to the Company as a result of closing investments, are normally paid at the closing of the investments, are generally non-recurring, and are recognized as revenue when earned upon closing of the investment. The services that the Adviser provides vary by investment, but can include closing, work, diligence or other similar fees and fees for providing managerial assistance to our portfolio companies.

 

Organization Expenses

 

Costs associated with the organization of the Company are expensed as incurred. These expenses consist primarily of legal fees and other costs of organizing the Company.

 

Offering Expenses

 

Costs associated with the offering of common shares of the Company will be capitalized as deferred offering expenses and included as prepaid and other assets on the consolidated statement of assets and liabilities and amortized over a twelve-month period from incurrence. These expenses consist primarily of legal fees and other costs incurred in connection with the Company’s continuous public offering of its common shares, the preparation of the Company’s registration statement, and registration fees.

 

Debt Issuance Costs

 

The Company records origination and other expenses related to its debt obligations as deferred financing costs. These expenses are deferred and amortized over the life of the related debt instrument. Debt issuance costs are presented on the consolidated statement of assets and liabilities as a direct deduction from the debt liability. In circumstances in which there is not an associated debt liability amount recorded in the consolidated financial statements when the debt issuance costs are incurred, such debt issuance costs will be reported on the consolidated statement of assets and liabilities as an asset until the debt liability is recorded.

 

Reimbursement of Transaction-Related Expenses

 

The Company may receive reimbursement for certain transaction-related expenses in pursuing investments. Transaction-related expenses, which are generally expected to be reimbursed by the Company’s portfolio companies, are typically deferred until the transaction is consummated and are recorded in prepaid expenses and other assets on the date incurred. The costs of successfully completed investments not otherwise reimbursed are borne by the Company and are included as a component of the investment’s cost basis.

 

Cash advances received in respect of transaction-related expenses are recorded as cash and cash equivalents with an offset to accrued expenses and other liabilities. Accrued expenses and other liabilities are relieved as reimbursable expenses are incurred.

 

Income Taxes

 

The Company has elected to be treated as a BDC under the 1940 Act. The Company also intends to elect to be treated as a RIC under the Code for the taxable year ending December 31, 2017. So long as the Company maintains its tax treatment as a RIC, it generally will not pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that it distributes at least annually to its shareholders as dividends. Instead, any tax liability related to income earned and distributed by Owl Rock represents obligations of the Company’s investors and will not be reflected in the consolidated financial statements of the Company.

 

The Company evaluates tax positions taken or expected to be taken in the course of preparing its consolidated financial statements to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax positions not

12


Owl Rock Capital Corporation II

Notes to Consolidated Financial Statements (Unaudited) – Continued

 

deemed to meet the “more-likely-than-not” threshold are reserved and recorded as a tax benefit or expense in the current year. All penalties and interest associated with income taxes are included in income tax expense. Conclusions regarding tax positions are subject to review and may be adjusted at a later date based on factors including, but not limited to, on-going analyses of tax laws, regulations and interpretations thereof.

 

To qualify as a RIC, the Company must, among other things, meet certain source-of-income and asset diversification requirements. In addition, to qualify for RIC tax treatment, the Company must distribute to its shareholders, for each taxable year, at least 90% of its “investment company taxable income” for that year, which is generally its ordinary income plus the excess of its realized net short-term capital gains over its realized net long-term capital losses. In order for the Company not to be subject to U.S. federal excise taxes, it must distribute annually an amount at least equal to the sum of (i) 98% of its net ordinary income (taking into account certain deferrals and elections) for the calendar year, (ii) 98.2% of its capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year and (iii) any net ordinary income and capital gains in excess of capital losses for preceding years that were not distributed during such years. The Company, at its discretion, may carry forward taxable income in excess of calendar year dividends and pay a 4% nondeductible U.S. federal excise tax on this income.

 

Distributions to Common Shareholders

 

Distributions to common shareholders are recorded on the record date. The amount to be distributed is determined by the Board and is generally based upon the earnings estimated by the Adviser. Net realized long-term capital gains, if any, would be generally distributed at least annually, although the Company may decide to retain such capital gains for investment.

 

The Company has adopted a dividend reinvestment plan that provides for reinvestment of any cash distributions on behalf of shareholders who have “opted in” to the dividend reinvestment plan. As a result, if the Board authorizes and declares a cash distribution, then the shareholders who have “opted in” to the dividend reinvestment plan will have their cash distribution automatically reinvested in additional shares of the Company’s common stock, rather than receiving the cash distribution. The Company expects to use newly issued shares to implement the dividend reinvestment plan.

 

Consolidation

 

As provided under Regulation S-X and ASC Topic 946 - Financial Services - Investment Companies, the Company will generally not consolidate its investment in a company other than a wholly-owned investment company or controlled operating company whose business consists of providing services to the Company. Accordingly, the Company consolidated the accounts of the Company's wholly-owned subsidiary in its consolidated financial statements. All significant intercompany balances and transactions have been eliminated in consolidation.

 

New Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in this ASU supersedes the revenue recognition requirements in Revenue Recognition (Topic 605). Under the updated guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in ASU No. 2014-09 are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.

 

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations, which clarifies the guidance in ASU No. 2014-09 and has the same effective date as the original standard.

 

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, an update on identifying performance obligations and accounting for licenses of intellectual property.

 

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which includes amendments for enhanced clarification of the guidance.

 

13


Owl Rock Capital Corporation II

Notes to Consolidated Financial Statements (Unaudited) – Continued

 

In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Revenue from Contracts with Customers (Topic 606), the amendments in this update are of a similar nature to the items typically addressed in the technical corrections and improvements project.

 

In February 2017, the FASB issued ASU No. 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, an update clarifying that a financial asset is within the scope of Subtopic 610-20 if it is deemed an “in-substance non-financial asset.”

 

The application of the aforementioned updated revenue recognition guidance is not expected to have a material impact on the Company’s consolidated financial statements. In additional, Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying consolidated financial statements.

Note 3. Agreements and Related Party Transactions

 

Administration Agreement

 

On February 6, 2017, the Company entered into an Administration Agreement (the “Administration Agreement”) with the Adviser. Under the terms of the Administration Agreement, the Adviser performs, or oversees the performance of, required administrative services, which includes providing office space, equipment and office services, maintaining financial records, preparing reports to shareholders and reports filed with the SEC, and managing the payment of expenses, and the performance of administrative and professional services rendered by others.

 

The Administration Agreement also provides that the Company reimburses the Adviser for certain organization costs incurred prior to the commencement of the Company’s operations, and for certain offering costs.

 

The Company reimburses the Adviser for services performed for it pursuant to the terms of the Administration Agreement. In addition, pursuant to the terms of the Administration Agreement, the Adviser may delegate its obligations under the Administration Agreement to an affiliate or to a third party and the Company will reimburse the Adviser for any services performed for it by such affiliate or third party.

 

For the three and nine months ended September 30, 2017, the Company incurred expenses of approximately $0.2 million and $0.5 million, respectively.

 

Unless earlier terminated as described below, the Administration Agreement will remain in effect until February 6, 2019 and from year to year thereafter if approved annually by (1) the vote of the Company’s Board, or by the vote of a majority of its outstanding voting securities, and (2) the vote of a majority of the Company’s directors who are not “interested persons” of the Company, of the Adviser or of any of their respective affiliates, as defined in the 1940 Act. The Administration Agreement may be terminated at any time, without the payment of any penalty, on 60 days’ written notice, by the vote of a majority of the outstanding voting securities of the Company, or by the vote of the Board or by the Adviser.

 

No person who is an officer, director, or employee of the Adviser or its affiliates and who serves as a director of the Company receives any compensation from the Company for his or her services as a director. However, the Company reimburses the Adviser (or its affiliates) for an allocable portion of the compensation paid by the Adviser or its affiliates to the Company’s Chief Compliance Officer, Chief Financial Officer and their respective staffs (based on the percentage of time those individuals devote, on an estimated basis, to the business and affairs of the Company). Directors who are not affiliated with the Adviser receive compensation for their services and reimbursement of expenses incurred to attend meetings.

 

Investment Advisory Agreement

 

On February 6, 2017, the Company entered into an Investment Advisory Agreement (the “Investment Advisory Agreement”) with the Adviser, which became effective on April 4, 2017, the date the Company met the minimum offering requirement. Under the terms of the Investment Advisory Agreement, the Adviser is responsible for managing the Company’s business and activities, including

14


Owl Rock Capital Corporation II

Notes to Consolidated Financial Statements (Unaudited) – Continued

 

sourcing investment opportunities, conducting research, performing diligence on potential investments, structuring its investments, and monitoring its portfolio companies on an ongoing basis through a team of investment professionals.

 

The Adviser’s services under the Investment Advisory Agreement are not exclusive, and it is free to furnish similar services to other entities so long as its services to the Company are not impaired.

 

Under the terms of the Investment Advisory Agreement, the Company will pay the Adviser a base management fee and may also pay a performance based incentive fee. The cost of both the management fee and the incentive fee will ultimately be borne by the Company’s shareholders.

 

The management fee is payable quarterly in arrears. The management fee is payable at an annual rate of 1.75% of the average value of the Company’s gross assets, excluding cash and cash equivalents but including assets purchased with borrowed amounts at the end of the Company’s two most recently completed calendar quarters. The management fee for any partial quarter is appropriately prorated. The determination of gross assets will reflect changes in the fair value of the Company’s portfolio investments. The fair value of derivatives and swaps held in the Company’s portfolio, which will not necessarily equal the notional value of such derivatives and swaps, will be included in the calculation of gross assets.

 

For the three and nine months ended September 30, 2017, the Company incurred management fees of approximately $112 thousand and $147 thousand, respectively.

 

The incentive fee consists of two components that are independent of each other, with the result that one component may be payable even if the other is not. A portion of the incentive fee will be based on the Company’s pre-incentive fee net investment income and a portion will be based on the Company’s capital gains. The portion of the incentive fee based on pre-incentive fee net investment income is determined and paid quarterly in arrears and equals (a) 100% of the pre-incentive fee net investment income between 1.5% quarterly preferred return, and 1.875%, referred to as the upper level breakpoint, of adjusted capital, plus (b) 20% of pre-incentive fee net investment income in excess of 1.875% of adjusted capital. Adjusted capital is defined as cumulative proceeds generated from sales of our common stock, including proceeds from our distribution reinvestment plan, net of sales load (upfront selling commissions and upfront dealer manager fees) reduced for (i) distributions paid to our shareholders that represent a return of capital on a tax basis and (ii) amounts paid for share repurchases pursuant to our share repurchase program, if any, measured as of the end of the immediately preceding calendar quarter. The quarterly preferred return of 1.5% and upper level breakpoint of 1.875% are also adjusted for the actual number of days in each calendar quarter.

 

For the three and nine months ended September 30, 2017, the Company did not incur a performance based incentive fee based on net investment income.

 

The second component of the incentive fee, the capital gains incentive fee, is payable at the end of each calendar year in arrears, and equals 20% of cumulative realized capital gains from inception through the end of each calendar year, less cumulative realized capital losses and unrealized capital depreciation on a cumulative basis from inception through the end of such calendar year, less the aggregate amount of any previously paid capital gains incentive fee for prior periods. In no event will the capital gains incentive fee payable pursuant to the Investment Advisory Agreement be in excess of the amount permitted by the Advisers Act, including Section 205 thereof.

 

While the Investment Advisory Agreement neither includes nor contemplates the inclusion of unrealized gains in the calculation of the capital gain incentive fee, pursuant to the interpretation of the American Institute for Certified Public Accountants Technical Practice Aid for investment companies, the Company accrues capital gains incentive fees on unrealized gains. This accrual reflects the incentive fees that would be payable to the Adviser if the Company’s entire investment portfolio was liquidated at its fair value as of the balance sheet date even though the Adviser is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.

 

For the three and nine months ended September 30, 2017, the Company accrued a performance based incentive fee based on capital gains of $3 thousand and $3 thousand, respectively.

 

Under the terms of the Investment Advisory Agreement, the Adviser is entitled to receive up to 1.5% of gross offering proceeds raised in the continuous public offering until all organization and offering costs paid by the Adviser or its affiliates have been recovered. The offering expenses consist of corporate and organizational expenses relating to offerings of shares of common stock, subject to limitations included in Investment Advisory Agreement; the cost of calculating the Company’s net asset value, including the

15


Owl Rock Capital Corporation II

Notes to Consolidated Financial Statements (Unaudited) – Continued

 

cost of any third-party valuation services; the cost of effecting any sales and repurchases of the common stock and other securities; fees and expenses payable under any dealer manager agreements, if any; debt service and other costs of borrowings or other financing arrangements; costs of hedging; expenses, including travel expense, incurred by the Adviser, or members of the Investment Team, or payable to third parties, performing due diligence on prospective portfolio companies and, if necessary, enforcing the Company’s rights; escrow agent, transfer agent and custodial fees and expenses; fees and expenses associated with marketing efforts; federal and state registration fees, any stock exchange listing fees and fees payable to rating agencies; federal, state and local taxes; independent directors’ fees and expenses, including certain travel expenses; costs of preparing financial statements and maintaining books and records and filing reports or other documents with the SEC (or other regulatory bodies) and other reporting and compliance costs, including registration fees, listing fees and licenses, and the compensation of professionals responsible for the preparation of the foregoing; the costs of any reports, proxy statements or other notices to shareholders (including printing and mailing costs); the costs of any shareholder or director meetings and the compensation of personnel responsible for the preparation of the foregoing and related matters; commissions and other compensation payable to brokers or dealers; research and market data; fidelity bond, directors and officers errors and omissions liability insurance and other insurance premiums; direct costs and expenses of administration, including printing, mailing, long distance telephone and staff; fees and expenses associated with independent audits, outside legal and consulting costs; costs of winding up; costs incurred in connection with the formation or maintenance of entities or vehicles to hold the Company’s assets for tax or other purposes; extraordinary expenses (such as litigation or indemnification); and costs associated with reporting and compliance obligations under the Advisers Act and applicable federal and state securities laws. Notwithstanding anything to the contrary contained herein, the Company shall reimburse the Adviser (or its affiliates) for an allocable portion of the compensation paid by the Adviser (or its affiliates) to the Company’s Chief Compliance Officer and Chief Financial Officer and their respective staffs (based on a percentage of time such individuals devote, on an estimated basis, to the business affairs of the Company). Any such reimbursements will not exceed actual expenses incurred by the Adviser and its affiliates. The Adviser is responsible for the payment of the Company’s organization and offering expenses to the extent that these expenses exceed 1.5% of the aggregate gross offering proceeds, without recourse against or reimbursement by the Company.

 

For the three and nine months ended September 30, 2017, subject to the 1.5% organization and offering cost cap, the Company accrued initial organization expenses of $0.3 million and $0.6 million, respectively.

 

Unless earlier terminated as described below, the Investment Advisory Agreement will remain in effect until April 4, 2019 and will remain in effect from year-to-year thereafter if approved annually by a majority of the Board or by the holders of a majority of our outstanding voting securities and, in each case, by a majority of independent directors who are not “interested persons” of the Company as defined in the 1940 Act.

 

The Investment Advisory Agreement will automatically terminate within the meaning of the 1940 Act and related SEC guidance and interpretations in the event of its assignment. In accordance with the 1940 Act, without payment of any penalty, the Company may terminate the Investment Advisory Agreement with the Adviser upon 60 days’ written notice and a majority vote of the of directors who are not “interested persons” of the Company or the shareholders holding a majority (as defined under the 1940 Act) of the outstanding shares of our common stock. In addition, without payment of any penalty, the Adviser may only be able to terminate the Investment Advisory Agreement upon 120 days’ written notice.

 

From time to time, the Adviser may pay amounts owed by the Company to third-party providers of goods or services, including the Board, and the Company will subsequently reimburse the Adviser for such amounts paid on its behalf. Amounts payable to the Adviser are settled in the normal course of business without formal payment terms.

 

Affiliated Transactions

 

The Company may be prohibited under the 1940 Act from conducting certain transactions with its affiliates without prior approval of the directors who are not interested persons, and in some cases, the prior approval of the SEC. The Company, the Adviser and certain of its affiliates have been granted exemptive relief by the SEC to co-invest with other funds managed by the Adviser or its affiliates, including Owl Rock Capital Corporation, in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors. Pursuant to such exemptive relief, the Company generally is permitted to co-invest with certain of its affiliates if a “required majority” (as defined in Section 57(o) of the 1940 Act) of the Board make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the transaction, including the consideration to be paid, are reasonable and fair to the Company and its shareholders and do not involve overreaching of the Company or its shareholders on the part of any person concerned, (2) the transaction is consistent with the interests of the Company’s shareholders and is consistent with its investment objective and strategies, and (3) the investment by its affiliates would not disadvantage the Company, and the Company’s participation would not be on a basis different from or less advantageous than that

16


Owl Rock Capital Corporation II

Notes to Consolidated Financial Statements (Unaudited) – Continued

 

on which its affiliates are investing. The Adviser’s investment allocation policy incorporates the conditions of the exemptive relief. As a result of exemptive relief, there could be significant overlap in the Company’s investment portfolio and the investment portfolios of Owl Rock Capital Corporation and/or other portfolio funds established by the Adviser that could avail themselves of the exemptive relief.

 

Dealer Manager Agreement

 

On February 8, 2017, the Company entered into a Dealer Manager Agreement (the “Dealer Manager Agreement”) with Owl Rock Capital Securities LLC (“Owl Rock Securities”), an affiliate of the Adviser. Under the terms of the Dealer Manager Agreement, Owl Rock Securities serves as the dealer manager for the Company’s public offering of its shares of common stock. As dealer manager, Owl Rock Securities will earn a maximum sales load of up to 5.0% of the price per share for combined upfront selling commissions and dealer manager fees, a portion or all of which may be reallowed to selling broker-dealers. In connection with purchases of shares pursuant to our distribution reinvestment plan, the upfront selling commissions and dealer manager fees will not be paid.

 

Owl Rock Securities is an affiliate of Owl Rock Capital Partners LP and will not make an independent review of the Company or the offering. This relationship may create conflicts in connection with the dealer manager’s due diligence obligations under the federal securities laws. Although the dealer manager will examine the information in the Company’s prospectus for accuracy and completeness, due to its affiliation with the Adviser, no independent review of the Company will be made in connection with the distribution of its shares.

 

Owl Rock Securities is a broker-dealer registered with the SEC, a member of the Financial Industry Regulatory Authority and a member of the Securities Investor Protection Corporation.

 

The Dealer Manager Agreement may be terminated at any time, without the payment of any penalty, by vote of a majority of the Company’s directors who are not “interested persons”, as defined in the 1940 Act, of the Company and who have no direct or indirect financial interest in the operation of the Company’s distribution plan or the Dealer Manager Agreement or by vote a majority of the outstanding voting securities of the Company, on not more than 60 days’ written notice to Owl Rock Securities and the Adviser. The Dealer Manager Agreement will automatically terminate in the event of its assignment, as defined in the 1940 Act.

 

 

Expense Support and Conditional Reimbursement Agreement

 

On February 6, 2017, the Company entered into an Expense Support and Conditional Reimbursement Agreement (the “Expense Support Agreement”) with the Adviser, the purpose of which is to ensure that no portion of the Company’s distributions to shareholders will represent a return of capital for tax purposes. The Expense Support Agreement became effective as of April 4, 2017, the date that the Company met the minimum offering requirement.

 

On a quarterly basis, the Adviser reimburses the Company for “Operating Expenses” (as defined below) in an amount equal to the excess of the Company’s cumulative distributions paid to the Company’s shareholders in each quarter over “Available Operating Funds” (as defined below) received by the Company on account of its investment portfolio during such quarter. Any payments required to be made by the Adviser pursuant to the preceding sentence are referred to herein as an “Expense Payment”.

 

Pursuant to the Expense Support Agreement, “Operating Expenses” means all of the Company’s operating costs and expenses incurred, as determined in accordance with U.S. GAAP for investment companies. “Available Operating Funds” means the sum of (i) the Company’s estimated investment company taxable income (including realized net short-term capital gains reduced by realized net long-term capital losses), (ii) the Company’s realized net capital gains (including the excess of realized net long-term capital gains over realized net short-term capital losses) and (iii) dividends and other distributions paid to the Company on account of preferred and common equity investments in portfolio companies, if any (to the extent such amounts listed in clause (iii) are not included under clauses (i) and (ii) above).

 

The Adviser’s obligation to make an Expense Payment will automatically become a liability of the Adviser and the right to such Expense Payment will be an asset of the Company on the last business day of the applicable quarter. The Expense Payment for any quarter will be paid by the Adviser to the Company in any combination of cash or other immediately available funds, and/or offset against amounts due from the Company to the Adviser no later than the earlier of (i) the date on which the Company closes its books for such quarter, or (ii) forty-five days after the end of such quarter.

 

17


Owl Rock Capital Corporation II

Notes to Consolidated Financial Statements (Unaudited) – Continued

 

Following any quarter in which Available Operating Funds exceed the cumulative distributions paid by the Company in respect of such quarter (the amount of such excess being hereinafter referred to as “Excess Operating Funds”), the Company will pay such Excess Operating Funds, or a portion thereof, in accordance the stipulations below, as applicable, to the Adviser, until such time as all Expense Payments made by Adviser to the Company within three years prior to the last business day of such quarter have been reimbursed. Any payments required to be made by the Company are referred to as a “Reimbursement Payment”.

 

The amount of the Reimbursement Payment for any quarter shall equal the lesser of (i) the Excess Operating Funds in respect of such quarter and (ii) the aggregate amount of all Expense Payments made by the Adviser to the Company within three years prior to the last business day of such quarter that have not been previously reimbursed by the Company to the Adviser. The payment will be reduced to the extent that such Reimbursement Payments, together with all other Reimbursement Payments paid during the fiscal year, would cause Other Operating Expenses defined as the Company’s total Operating Expenses, excluding base management fees, incentive fees, organization and offering expenses, distribution and shareholder servicing fees, financing fees and costs, interest expense, brokerage commissions and extraordinary expenses on an annualized basis and net of any Expense Payments received by the Company during the fiscal year exceeds the lesser of: (i) 1.75% of the Company’s average net assets attributable to the shares of the Company’s common stock for the fiscal year-to-date period after taking such Expense Payments into account; and (ii) the percentage of the Company’s average net assets attributable to shares of the Company’s common stock represented by Other Operating Expenses during the fiscal year in which such Expense Payment was made (provided, however, that this clause (ii) shall not apply to any Reimbursement Payment which relates to an Expense Payment made during the same fiscal year).

 

No Reimbursement Payment for any quarter will be made if: (1) the “Effective Rate of Distributions Per Share” (as defined below) declared by the Company at the time of such Reimbursement Payment is less than the Effective Rate of Distributions Per Share at the time the Expense Payment was made to which such Reimbursement Payment relates, or (2) the Company’s “Operating Expense Ratio” (as defined below) at the time of such Reimbursement Payment is greater than the Operating Expense Ratio at the time the Expense Payment was made to which such Reimbursement Payment relate. Pursuant to the Expense Support Agreement, “Effective Rate of Distributions Per Share” means the annualized rate (based on a 365 day year) of regular cash distributions per share exclusive of returns of capital, distribution rate reductions due to distribution and shareholder fees, and declared special dividends or special distributions, if any. The “Operating Expense Ratio” is calculated by dividing Operating Expenses, less organizational and offering expenses, base management and incentive fees owed to Adviser, and interest expense, by the Company’s net assets.

 

The specific amount of expenses reimbursed by the Adviser, if any, will be determined at the end of each quarter. The Company or the Adviser may terminate the Expense Support Agreement at any time, with or without notice. The Expense Support Agreement will automatically terminate in the event of (a) the termination of the Investment Advisory Agreement, or (b) the Board of the Company makes a determination to dissolve or liquidate the Company. Upon termination of the Expense Support Agreement, the Company will be required to fund any Expense Payments, subject to the aforementioned requirements per the Expense Support Agreement, that have not been reimbursed by the Company to the Adviser.

 

As of September 30, 2017, the amount of Expense Support Payments provided by the Adviser since inception is $2.1 million. Management believes that the Reimbursement Payments by the Company to the Adviser were not probable under the terms of the Expense Support Agreement as of September 30, 2017. The following table reflects the Expense Support Payments that may be subject to reimbursement pursuant to the Expense Support Agreement:

 

For the Quarter Ended

 

Amount of Expense Support

 

 

Effective Rate of Distribution per Share(1)

 

 

Reimbursement Eligibility Expiration

 

Lesser of Other Operating Expense Ratio or 1.75%(2)

 

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

$

1,061

 

 

 

7.0%

 

 

June 30, 2020

 

 

1.75%

 

September 30, 2017

 

 

1,023

 

 

 

7.0%

 

 

September 30, 2020

 

 

1.75%

 

Total

 

$

2,084

 

 

 

 

 

 

 

 

 

 

 

________________

 

(1)

The effective rate of distribution per share is expressed as a percentage equal to the projected annualized distribution amount as of the end of the applicable period (which is calculated by annualizing the regular weekly cash distributions per share as of such date without compounding), divided by the Company’s gross offering price per share as of such date.

 

(2)

Represents the lesser of Other Operating Expenses or 1.75% of average net assets.

18


Owl Rock Capital Corporation II

Notes to Consolidated Financial Statements (Unaudited) – Continued

 

License Agreement

 

The Company has entered into a license agreement (the “License Agreement”) with Owl Rock Capital Partners LP, pursuant to which Owl Rock Capital Partners LP has granted a non-exclusive license to use the name “Owl Rock.” Under the License Agreement, the Company has a right to use the Owl Rock name for so long as the Adviser or one of its affiliates remains the Company’s investment adviser. Other than with respect to this limited license, the Company will have no legal right to the “Owl Rock” name or logo.

 

Promissory Note

 

On May 18, 2017, the Board authorized the Company, as Borrower, to enter into a series of promissory notes (the “Promissory Notes”) with the Adviser.  See Note 6 “Debt”.

 

 

Note 4. Investments

 

Under the 1940 Act, the Company is required to separately identify non-controlled investments where it owns 5% or more of a portfolio company’s outstanding voting securities and/or had the power to exercise control over the management or policies of such portfolio company as investments in “affiliated” companies. In addition, under the 1940 Act, the Company is required to separately identify investments where it owns more than 25% of a portfolio company’s outstanding voting securities and/or had the power to exercise control over the management or policies of such portfolio company as investments in “controlled” companies. Under the 1940 Act, "non-affiliated investments" are defined as investments that are neither controlled investments nor affiliated investments. Detailed information with respect to the Company’s non-controlled, non-affiliated; non-controlled, affiliated; and controlled affiliated investments is contained in the accompanying consolidated financial statements, including the consolidated schedule of investments. The information in the tables below is presented on an aggregate portfolio basis, without regard to whether they are non-controlled non-affiliated, non-controlled affiliated or controlled affiliated investments.

 

19


Owl Rock Capital Corporation II

Notes to Consolidated Financial Statements (Unaudited) – Continued

 

Investments at fair value and amortized cost consisted of the following as of September 30, 2017:

 

 

 

September 30, 2017

 

($ in thousands)

 

Amortized Cost

 

 

Fair Value

 

First-lien senior secured debt investments