Key Takeaways:
A widening gap between Blue Owl Capital Corp.’s (OBDC) share price and its net asset value is spotlighting investor unease with opaque valuations in the private credit market. The business development company’s stock trades at a 22% discount to its stated NAV, a gap that has widened since it reported a 3% NAV decline to $7.2 billion in the first quarter.
“If digging beneath the surface leads to more questions than answers, there’s no telling what sorts of unusual estimates are driving the valuations of many other investments for which there is even less transparency,” Jonathan Weil of The Wall Street Journal wrote.
The scrutiny of Blue Owl’s valuations comes as the entire BDC sector faces pressure. A Reuters review of 14 major BDCs found the aggregate fair value-to-cost ratio fell 103 basis points to 98.55% in the first quarter. Moody’s recently downgraded its outlook for the BDC sector to negative, and Fitch reported that redemptions from non-traded BDCs climbed to 3.8% of prior-quarter NAV in Q1. Blue Owl’s own NAV per share fell 2.7% to $14.41 in the same period.
At the heart of the issue for Blue Owl are its Level 3 assets, which are valued using unobservable inputs. For example, the fund valued its equity stake in lender Wingspire Capital at 1.3 times EBITDA, an unusual metric for a lender as it ignores interest expense. Another holding, Fifth Season Investments, was valued at 1.0 times its assets under management. Together, these two investments account for 13% of OBDC’s net assets, and their unconventional valuation methods raise questions about the accuracy of the fund’s overall NAV.
This article is for informational purposes only and does not constitute investment advice.
