Blue Owl Technology Finance Q1 FY26 earnings call OTF

The company acknowledges the significant market concern around software, particularly regarding AI's transformative impact. While initial debates questioned the existence of software businesses in an AI-enabled world, the discussion is now more balanced, distinguishing between durable businesses and those exposed to change. OTF's portfolio is positioned in mission-critical products, embedded workflows, and trusted data, with a weighted average EBITDA of nearly $300 million, providing resilience. Management views AI as a catalyst for product enhancement rather than solely disruption, citing partnerships like Thoma Bravo and Google Cloud.

Credit performance remains very strong, with no new nonaccruals this quarter and a nonaccrual rate of just 10 basis points of the total portfolio at fair value, significantly below the industry average. Internal ratings for 3 to 5 rated names were steady at 8.5% at fair value. Amendments remained light, and portfolio company revolver utilization was consistent at just under 10%. PIK income was moderate at approximately 13% of total investment income, with over 98% structured at origination and no realized losses on such PIK loans since inception.

Q1 FY26 results were impacted by broader volatility in technology and software assets, leading to market-driven valuation pressures. Over 80% of the write-down was attributable to mark-to-market movements, not underlying credit weakness. Weighted average LTVs rose modestly to 40% from 34% due to the market sell-off, but remain conservative. Since quarter-end, technology broadly syndicated loan prices have rebounded by roughly 70 basis points in April, indicating a more constructive market sentiment.

OTF has ample dry powder and the ability to increase leverage towards its target range of 0.9x to 1.25x. While software remains a primary focus, the company's underwriting bar for new investments is higher, and it is increasingly selective. Slower software deal flow may create opportunities in adjacent technology areas like digital infrastructure (e.g., GPU and data center financings) and life sciences (e.g., drug royalties, term loans for later-stage companies), where Blue Owl has dedicated investment teams and sees less correlated returns.

The company repurchased approximately $50 million of stock during the quarter, contributing $0.05 per share of accretion to NAV. Total repurchases over the past two quarters amount to $115 million. A new $300 million share repurchase program was authorized, replacing the prior $200 million authorization, with $250 million remaining. OTF issued a $400 million unsecured bond in January, swapped to a floating rate, demonstrating continued access to the investment-grade unsecured market.