Blue Owl Technology Finance (NYSE:OTF) Q3 2026 Earnings Call

0:00 Good morning, everyone, and welcome to the Blue Owl Technology Finance Corp.'s third quarter 2026 earnings call. As a reminder, this call is being recorded. At this time, I'd like to turn the call over to Mike Masticcio, head of BDC Investor Relations. Mike, please go ahead.

0:16 Thank you, operator, and welcome to Blue Owl Technology Finance Corp.'s third quarter 2026 earnings conference call. Joining us on the call today are Craig Packer, Chief Executive Officer, Erik Bissonnette, President, and Jonathan Lamm, Chief Financial Officer. I'd like to remind listeners that remarks made during today's call may contain forward-looking statements, which are not guarantees of future performance or results and involve a number of risks and uncertainties that are outside of the company's control. Actual results may differ materially from those in forward-looking statements as a result of a number of factors, including those described in OTF's filings with the SEC. The company assumes no obligation to update any forward-looking statements. We would also like to remind everyone that we'll refer to non-GAAP measures on this call, which are reconciled to GAAP figures in our earnings presentation available on the Events and Presentations section of our website. Certain information discussed on this column in the company's earnings materials, including information related to portfolio companies, was derived from third-party sources and has not been independently verified.

1:21 The company makes no such representations or warranties with respect to this information. Yesterday, OTF issued its financial results for the third quarter ended September 30, 2026, reporting gap in adjusted net investment income of $0.29 per share and net asset value of $0.16. Thank you, Mike. Good morning, everyone, and thank you all for joining us today. OTF delivered another strong quarter, the net asset value per share increasing and a net income ROE of 11.7%.

2:09 Credit quality remained healthy, reflecting the continued resilient performance of the scaled, mission-critical technology businesses we financed. Sentiment toward software and technology has improved meaningfully over the past six months. Earlier this year, concerns around AI's impact on software were indiscriminate. Today, we are seeing a more balanced assessment of risk, with the market increasingly distinguishing between businesses with durable competitive positions that are poised to benefit from AI and those that may be more vulnerable to disruption. That shift is now starting to be reflected in the public markets. Public software equities have rallied approximately 35% from their April lows, reversing nearly all of the decline earlier this year. Refinancing activity has picked up in the broadly syndicated loan market, with several large software issuers completing refinancings or extensions in recent months.

3:01 These are encouraging developments for deal activity and for the maturity concerns that weighed on the sector earlier this year. Importantly, this improvement in market sentiment, combined with the strong fundamentals of companies across our portfolio, contributed to the increase in NAV this quarter. Software continues to be the strongest performing area across our broader direct lending portfolio, with our borrowers generating steady growth in revenue and EBITDA, non-accruals that remain below industry averages. Turning to earnings, NII was modestly lower than last quarter, reflecting lighter deployments and essentially unchanged leverage. Our earnings did not grow as much as we would have liked. Our outlook has not changed. We continue to expect NII to increase toward coverage of the dividend by the middle of next year, and we believe we remain on track to achieve that objective.

3:51 There are several tailwinds we expect to support that growth. Since the beginning of the year, new issue spreads have widened, forward rate expectations have moved higher, and the reduced availability of capital for software and technology investments has created a more attractive environment for lenders with deep relationships, underwriting expertise, and ample capacity to deploy selectively. In addition, our equity portfolio provides another source of potential value creation. These investments have generated meaningful gains to OTF over time and have contributed to net income ROE above what we generated from our core lending portfolio alone. Furthermore, OTF continues to benefit from the breadth of Blue Isle's differentiated investment capabilities, which combine our deep expertise across technology subsectors with the broader platform sourcing relationships and underwriting resources.

4:43 These strengths give us a unique advantage to access attractive opportunities beyond traditional software lending. We have previously discussed how these capabilities have enabled us to pursue opportunities in life sciences. In this quarter, our largest new investment was in GPU financing, that levers the expertise of both our technology lending and digital infrastructure teams. Erik will discuss this transaction and how we were able to originate it in more detail shortly. Alongside these origination efforts, we have taken steps to ensure our balance sheet is well positioned to capitalize on these opportunities. During the quarter, OTF raised $900 million of debt financing across unsecured notes and secured facilities, further strengthening liquidity and diversifying our funding base. Jonathan will provide more detail, but with leverage at the low end of our target range, we have ample capacity to deploy into this more attractive investment environment.

5:37 With that, I'll turn it over to Erik.

5:39 Thanks, Craig, and good morning, everyone. Deal activity was lighter in the third quarter as we have now worked through the backlog of commitments made before spreads widened. As a result, new originations this quarter reflected today's more attractive pricing with effective spreads, inclusive of opportunistic discounted purchases averaging 5.8%, more than 120 basis points wider than the 4.6% levels that we saw in the fourth quarter of last year. In the third quarter, we made approximately $441 million of new commitments and funded over $395 million compared to nearly $335 million in sales and repayments. Repayments included several notable realizations from healthcare and life sciences investments including Catalent, Unbalance Sheet, and Zillow Royalty within LSI, our life science and specialty finance vehicle that we've mentioned on prior calls.

6:33 Both investments generated low to middle double digit IRRs, underscoring the value of our differentiated capabilities. While net deployment was modest, we remained active in evaluating new opportunities and committed capital selectively where we saw the most compelling risk adjusted returns. Software deal flow remained muted over the quarter, but we continue to find opportunities within our existing portfolio. Approximately half of deployments were in existing borrowers through add-ons and refinancings where our incumbency allows us to support high quality companies we know well while actively managing our exposures. One investment that illustrates the value of these relationships is AlphaSense where we have been invested in the company for over two years. During the quarter, we provided a $60 million upsize at SOFR plus 6.25% meaningfully above the portfolio's current weighted average spread of 5.3%.

7:27 The transaction allowed us to increase our investment in a high-performing business in which we have strong conviction in, while supporting its ongoing growth objectives at Attractive Economics. In terms of new borrowers, OTF's largest investment this quarter was the GPU financing for Iren, a publicly listed, vertically iterated AI cloud platform that delivers data centers, compute, and software for AI training and inference. The $2.4 billion transaction included $1.1 billion provided by Blue Owl, including $180 million from OTF. The investment is contractually structured to generate a return profile in the low teens. This structure reflects how we approach GPU financings more broadly. We focus on short-duration, fully amortizing investments where repayment does not depend on residual equipment value. Iron fits that template.

8:19 The facility is senior secured on the GPUs, It amortizes fully over a short tenor and the borrower is a publicly listed company with multi-year contracts with large, high-quality counterparts. The transaction also demonstrates how the breadth of the Blue Owl platform creates differentiated investment opportunities. We brought together our alternative credit, technology lending, and digital infrastructure teams to underwrite the equipment, borrower, and underlying infrastructure. That combination of capabilities allows us to access attractive opportunities and a growing AI compute ecosystem while maintaining our strong focus on downside protection. Digital infrastructure financings now represent nearly 2% of OTF's portfolio at fair value. We see the potential for that allocation to grow up to the mid to high single digits over time, but we recognize this is a dynamic and rapidly evolving market will remain focused on the opportunities that offer the most attractive risk-adjusted returns.

9:18 Turning to the portfolio, overall credit quality remains strong, reflecting the healthy performance of our borrowers. OTF primarily focuses on scaled, sponsor-backed companies with a weighted average EBITDA of nearly $290 million, providing a strong foundation for navigating a variety of market conditions. As Craig mentioned, our borrowers are growing revenue and EBITDA by mid to high single digits, with software generally going faster than the other areas across Blue Owl's broader direct lending portfolio. This performance is particularly noteworthy given that software represents over 70% of the portfolio. While we continue to closely monitor the impact of AI, we have seen minimal evidence of material disruption across our borrowers to date.

10:05 We believe this resilience reflects both the quality of the companies we finance and our focus on durable areas of software, particularly businesses with mission critical applications, deeply embedded workflows and trusted data. Non-accruals also remain low at 1.1% at fair value across three portfolio companies with one new name added during the quarter and continue to be among the lowest in the industry. Other indicators of portfolio quality also remain at healthy levels with three to five rated names representing approximately 9% of the portfolio at fair value and portfolio company Revolver Utilization at less than 12%. Amendment activity also remained light during the quarter.

10:50 The portfolio remains conservatively structured with over 80% invested in senior secured loans and a weighted average LTV of 40%. That leaves substantial equity cushion beneath our positions and reflects our focus on maintaining structural protection, particularly during periods of volatility when valuations reset as they did for software earlier this year. Finally, PIC income was 11.5% of total investment income this quarter. Importantly, approximately 98% of OTF's PIC was structured at origination rather than added through later amendments. We continue to use PIC selectively as it can be a valuable return enhancer for high quality borrowers reinvesting in growth. We're also seeing tangible signs of improvement in the broader financing markets.

11:38 In recent months, and a number of large well-known software companies have extended their maturities in the broadly syndicated loan market, including several multi-billion dollar facilities. While activity remains below historical levels, these transactions demonstrate that capital is available and there continues to be demand for high quality software credits. Spreads on these deals have reset significantly wider than on the original loans. Additionally, documentation has tightened, debt incurrence has reduced and in a number of cases, sponsors have put in new equity or paid down senior debt as part of the extensions. We view this as a very constructive market backdrop for OTF. Within our own portfolio, we continue to review every name and remain confident in how the portfolio is positioned. The maturities of our investments are well laddered and not concentrated, with no single year representing more than 20% of the portfolio.

12:32 We have also continued to receive repayments demonstrating that performing software companies continue to be valuable and have access to capital. At the same time, we are not idly waiting for maturities to approach. We engage with sponsors and management teams years in advance to discuss their financing needs and we use those conversations as an opportunity to fully re-underwrite each investment. For companies where our conviction remains high, we can reinvest in today's more attractive market economics and typically with tighter terms, enhanced reporting, and in some cases, additional sponsor equity beneath our loan. For companies where our conviction has changed, amendments and refinancings can provide an opportunity to reduce our exposure. To give you an example, earlier this year, we agreed to extend the maturity on one of our software loans by two years. In connection with that extension, we received a pay down of approximately one third of our position at par, along with wider pricing, an extension fee and a tighter set of terms. We view that as a good outcome.

13:33 We remain invested in a business we know well, with less exposure and better economics. Looking ahead, we remain focused on growing the portfolio toward the midpoint of our target leverage range, with wider spreads in software and differentiated opportunities across digital infrastructure and life sciences, providing multiple avenues for attractive deployment. We remain confident in the quality of the portfolio and the opportunity ahead. Now I'll turn the call over to Jonathan to discuss our financial results in more detail.

14:03 Thank you, Erik. In the third quarter, OTF reported net investment income of 29 cents per share, compared with 30 cents per share last quarter. The modest decline reflected the impact of the new non-accrual, partially offset by modestly higher average leverage throughout the quarter. Earlier this week, the Board declared a fourth quarter base dividend of 35 cents per share, unchanged from last quarter, and payable on or before January 15th to shareholders of record as of December 31st. We ended the quarter with spillover income of approximately 35 cents per share, supported by realized gains from investments such as SpaceX, providing additional support for our dividend.

14:49 As Craig noted, we remain confident in our earnings trajectory. While the path may not be linear, we expect to cover the base dividend by the middle of next year. With all else equal, getting there assumes approximately $1.2 billion of net portfolio deployment and leverage increasing toward 1.15 times. While deployment can vary quarter to quarter, we have historically generated approximately $650 million of gross originations per quarter since inception. And wider spreads on new investments should provide an additional tailwind as we grow the portfolio. In addition, higher base rates provide another tailwind to earnings.

15:35 To put that impact into perspective, with approximately 96 percent of our debt investments floating rate and all else equal, a 100 basis point increase in base rates would increase quarterly NII by approximately two cents per share. Moving to the balance sheet. NAV per share at the end of the quarter was $16.62, up 14 cents or 90 basis points from last quarter. This increase reflected the recovery in portfolio valuations as spreads tightened and the broader software market rebounded, along with six cents of accretion from share repurchases. During the quarter, we repurchased another $55 million of stock, bringing total repurchases over the past year to roughly $225 million.

16:29 These repurchases reflect our confidence in the quality of the portfolio and attractiveness of our shares at current levels, while preserving ample capital to deploy. Following our third quarter activity, approximately $140 million remains available under our current $300 million authorization. We ended the quarter with net leverage of 0.94 times at the lower end of our target range of 0.9 to 1.25 times, providing significant capacity to continue growing the portfolio into a meaningfully improved environment for technology investments. We also continue to strengthen and diversify our capital structure during the quarter, raising $900 million across unsecured notes and secured financing.

17:21 This included $550 million of senior unsecured bonds, $250 million through a new SPV facility, and $100 million upsizing of an existing bilateral SPV. As a result, we ended the quarter with approximately $2.9 billion of cash and available capacity across our credit facilities, providing substantial liquidity to support further deployment. We view our diversified funding base and available capacity as strong validation of both the underlying portfolio and the durability of OTF's funding model. Overall, OTF finished the quarter with higher NAV per share, significant balance sheet capacity, and a strengthened capital structure, positioning us well to deploy into the more constructive investment environment.

18:15 And now I'll hand it back to Craig to provide final thoughts for today's call.

18:20 Thanks, Jonathan. As we wrap up today's call, I want to take a step back and offer some perspective on OTF today, particularly considering our current valuation and resulting dividend yield north of 14%. Think back to the beginning of the year. There were significant questions around the impact of AI on software, the health of technology credit, and whether companies would be able to refinance their debt. Nine months later, we have much more clarity and the picture looks considerably better. Sentiment around software in the age of AI has improved meaningfully. Software markets have rebounded. Our portfolio companies continue to perform well. And importantly, we're seeing capital available for high quality technology companies, both in our portfolio and across the broader market.

19:05 At the same time, the value of our capital has also increased. Technology spreads remain more than 100 basis points wider than at the start of the year, while higher base rates provided an additional tailwind for our predominantly floating rate portfolio. We have also strengthened OTF's balance sheet, giving us ample capacity to invest in this improved environment. We believe the setup today is compelling. Our focus is on continuing to deliver strong portfolio performance, growing earnings, and putting capital to work at attractive risk-adjusted returns. We're excited about the opportunity ahead and believe OTF is well positioned to continue creating meaningful value for shareholders. Thank you all for joining today's call. Operator, please open the line for questions. Certainly, when I'll be conducting a question and answer session, if you'd like to be placed into question queue, please press star 1 on your telephone keypad.

19:55 A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. We ask you to please ask one question and one follow-up, then return to the queue. Our first question today is coming from Faneen O'Shea from Wells Fargo. Your line is now live.

20:14 Hi. Hey, everyone. Good morning. I guess sort of picking it up on the closing and throughout the call remarks on software, et cetera, improving. Can you talk about the flip side of that, which is maybe lower new origination spreads? Like, do you think there can be something of a Goldilocks here where you have stable credit and you and you can execute on meaningful spread pickup or is the sort of other side of that coin maybe gonna be a headwind to your ramp?

20:56 I'll start, Erik, you're welcome to chime in. Look, the cost of capital for software is higher than it was at the beginning of the year and I think it's gonna stay higher for a while. I just would remind everyone Software spreads had contracted considerably. If you went back four or five years ago, the software had much wider spreads. And so I think in some ways you're just seeing a reversion back to more traditional software spreads. I think that is the operating environment we're going to be in for a while. I think what's changed now is really just a much more balanced view of what the impact is gonna be from AI on the credits.

21:41 I feel much better about that. I think the market feels better about that. So I think we can get both good credit performance as well as meaningfully higher spreads than what we've experienced over the last couple years. That's what we expect to have happen. I don't... I don't see such a dramatic change in sentiment where spreads are going back to where they were.

22:13 Okay, appreciate that. And then on the borrowing, the four, I think you said, transactions this quarter, one of them, Smaller private placement, but on the expensive end, I don't know if that's a move in the swap curve through the quarter or whatnot, but I guess big picture there, has that improved what we should think about on the go forward for your borrowing spreads?

22:54 The unsecured spreads for OTF are wider. What we did there was take advantage of an opportunity of a reverse into us for a private placement, but we've been able to execute in the public unsecured markets as well. It is wider, but again, things are calming down and we have a significant amount of financing already in the books available for us from a capacity perspective. We have one maturity next year. It's early in the year. So we can be opportunistic and we'll hopefully see a little bit of a reversion of some of those spreads.

23:39 But again, we can pay higher spreads on the financing side because we expect to see higher spreads on the lending side as well. So we still think it's attractive. We're definitely getting better execution on the secured side of the financing ledger in tech than we are on the unsecured, but we would expect to be executing in both places as we continue to grow towards target leverage.

24:14 All I would add to that is it's about $150 million. It pushes out duration. It's a 32. We also increased our 29s by 400 and increased an existing SPV by about 100 and then took a new 250. So access to capital across secure and unsecure remains robust and a small amount of issuance pretty far out the curve. for six years is not meaningful to the overall weighted average cost of debt and something we did selectively.

24:51 Great thing. Actually, I'll throw this. If I could do one more. On the IRIN deal, is that pretty in line with what we'd expect? It's a nine fixed. Are there any Is there meaningful call pro or other structure there that might enhance that or should we think about that sort of range as you ramp that strategy?

25:20 Yeah, there's some other economics in addition. As we said on the call, the overall expected return is in the low double digits. Obviously, there's been some pretty dramatic adjustments over the past few days in terms of unsecureds in the neocloud environment. as well as their equities. What we know is that the need for capital is enormous and we'll continue to be involved in financing these businesses. I think the spreads are going to continue to widen out for some period of time. We can talk specifically about how we think the right structures to build around those risks and to actually lend against the GPUs will continue to work.

26:08 But we think the spread environment is going to get better from our perspective, and the opportunity set is extremely large. So I think that might be on the tight side over

26:17 time. I just want to underscore, you know, low double digits and very short duration. This is a very short duration piece of paper. So we think it's extremely defensive.

26:30 Thank you. Thank you. Thank you. Next question today is coming from Chris Muller from Citizens Capital Markets. Your line is now live.

26:40 Hey guys, thanks for taking the questions. So I guess looking at spreads on new investments in both the second quarter and the third quarter, both north of 5%, but a lot of the tech stress wasn't until after the quarter and looks like it's continuing pretty broadly today. So I guess what are you guys seeing in terms of spreads into the fourth quarter and do these type of market disruptions create an opportunity for you guys or do you kind of take a more cautious view?

27:06 Yeah, obviously it's been a very busy few days in terms of market reactions, so hard to say what new deals will look like. What I'm confident in is that the opportunity set that we find attractive is still extremely large. Craig mentioned this earlier, I think the supply of capital is meaningfully smaller than it has been over the past few years. So as long as we continue to retain discipline about what we are really focused on, On the software side as well as the digital infrastructure side, I think we're in a very attractive setup given the backup that we're seeing in the markets. The fundamentals around how we're approaching things like digital infrastructure, we are looking at companies where we're not really underwriting the actual Neocloud itself, you know, we're approaching GPU financing the way we think about downside principle protection, how we ensure structure, collateral, and cash flows are really secure, not necessarily views on the chips or the residual values.

28:09 And we think those spreads are going to continue to widen out for some period of time. There is no change in the demand for compute. We think the supply for compute will obviously be a little more challenged given the change of what we're seeing and the fallout potentially here from a change in government.

28:27 Got it. And Jonathan touched on this a little bit, but net fundings were lowest of the year. I guess looking at your guys' pipeline, how are you thinking about net deployment over the coming quarters?

28:41 Look, we're very selective. We feel confident that there's plenty of opportunities available in the market. It's been a muted environment. Sponsor M&A has been muted in tech, but overall across multiple multiple industries. It's typically a seasonally like quarter but an industry dynamic not one specific to us. Software has been slow but is repricing so we think the opportunities that there is attractive. Hopefully we will see some continued expansion of activity in that space. On the other side, the digital infrastructure market that I just articulated The demand for that capital is not going away. I think the supply of that capital is going to get meaningfully tighter. The opportunity set is going to get more attractive.

29:28 Our counterparties will be even more attractive and the structures will be extremely conservative at meaningfully wider spreads, typically, as also Craig alluded to, for very short duration pieces of paper. So I'm cautiously optimistic about what we need to get done. to get to our target leverage for our guidance by the middle of next year, as Jonathan alluded to in the script. It's about $1.2 billion of deployment, so we don't need a heroic recovery of deal activity to get to where we need to go. We're going to continue to be extremely selective, and it's in our control. We have the capital, we have the deal flow, and we'll get there when we see the right opportunities.

30:08 Look, I just underscore, it's very clear that there's a lot of software credits that need to get refinanced over the next couple years. I think that's, if anything, a concern of the market. Is there enough capital for it? So we think we're going to be able to be selective, and as those refinancings happen, we'll be able to pick and choose the credits, and we're going to be able to get market spreads, which are going to be attractive. So any one or two quarters can be higher or lower, but I feel very comfortable with our opportunity set to get to our target leverage and continue to improve on spread in the portfolio.

30:47 Got it. It's all very helpful. I appreciate you guys taking the questions today. Thank you. Thank you. As a reminder, that's star one to be placed into question Q. Our next question is coming from Aaron Siganovich from Truist Securities. Your line is now live.

31:03 Thanks. You know, with, I guess, a more muted investing environment for OTF, you know, why not just utilize more of the buyback to get to your target leverage and kind of just rotate to the extent that those kind of newer opportunities come about.

31:27 We're going to continue to do both. We think the stock is very attractive where it's trading. We're going to continue to buy stock. And we think that new investments are coming at very attractive returns. And we're going to continue to be active in both.

31:45 All right, fair enough. When I look at the maturities that you have in 27 and 28, it's actually not a ton in 27 from what I'm looking at. Their average marks are pretty close to par. Do you see any notable risk in terms of maturities over 27 and 28?

32:11 No, we don't see a near-term maturity wall. As you said, less than 3% of total portfolio matures before 28. 28 is the first meaningful year. It's about 16% of fair value. So borrowers typically start to think about refinancing conversations 12 to 24 months ahead of maturity. So we are well underway with those conversations today. Beyond that, we think the book is extremely well-laddered. No single year is more than 15% or 16%. about 60% matures after 2030. So we think we're in a good position. There's no real near-term issues in terms of what we see in the portfolio. And things outside of our portfolio hopefully will be an opportunity for those new opportunities for companies that we know that we might not have been a part of in the past to potentially re-underwrite.

33:05 Great, thanks Eric.

33:08 Thank you. Thank you. As a reminder, that's star one to be placed into question queue. Our next question is coming from Jason Stewart from Compass Point. Your line is now live.

33:20 Great. Thanks. Looking at new investment activity, I think perhaps the iron transactions skewed these statistics a little bit if that was included. But could you just talk through maybe some of the larger kind of KPIs in there in terms of average investment size? You've talked about spread being much higher. You know, fixed versus floating and how you would expect that to migrate from where we were in the third quarter going forward.

33:45 Yeah, I think what you're referencing is that Iron was a fixed rate security. That is idiosyncratic to that specific transaction. That is not something that we would expect to see. It's not something we're seeing throughout the portfolio or requests from potential borrowers or corporate counterparties. We don't expect a meaningful mixed shift with respect to fixed versus floating. It just happened to be a pretty large transaction in a somewhat muted quarter.

34:14 Let's give a flavor for just general deal flow, bite size, spreads.

34:20 Yeah, so we're looking to do typically 750 to 100 base point positions. What we have seen in terms of new deal flow, particularly on the software side, it has been somewhere between 550 to 650, depending on the size of the transaction and the relative opportunity. We've seen leverage come down fairly significantly. Fairly dramatically, LTVs have been fairly steady. So we're still looking at roughly 35% to 40% new LTVs. So no material change. The opportunity set in terms of quality is high. Leverage is down and rates are wider. We're just hoping for a little bit of a comeback in overall market activity.

35:01 Okay. Has average deal size changed at all?

35:06 There's just not a lot of deals. I think The size of the average transaction has come down pretty dramatically, but that's off a pretty small sample set.

35:17 Okay. All right. That's fair. Thank you. And then one follow-up on the GPU compute finance business. Is the focus going forward all U.S.-based, or is there any international exposure expected?

35:29 Look, I think we'll look at selective opportunities domestically and internationally. Obviously, we have limitations with respect to how many non-qualifying assets we can have, but if there are attractive opportunities for large players abroad, we'll obviously take the time to selectively review those as well.

35:46 Okay. Thank you. Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further closing comments.

35:56 All right, appreciate all the interest. We feel really good about the outlook for OTF, you know, the environment and the opportunity set. We welcome any follow-up questions from anyone. Just reach out to us directly. We'd be happy to engage with you. And with that, have a great afternoon. Thank you. That does conclude our teleconference and webcast. Let me disconnect your line at this time and have a wonderful day. We thank you for your participation today.