KBRA Affirms Ratings for Blue Owl Capital Corporation II

KBRA affirms the BBB issuer and senior unsecured debt ratings for Blue Owl Capital Corporation II (“OBDC II” or “the company”), formerly Owl Rock Capital Corporation II. The Outlook for the ratings is Positive.

Key Credit Considerations

The ratings and maintenance of the Positive Outlook are supported by the company’s ties to the solid $79.5 billion Blue Owl direct lending platform as of September 30, 2023, the derived benefits from OBDC II’s SEC exemptive relief to co-invest with other funds managed by the advisor and its affiliates, and its diversified $2.1 billion investment portfolio comprised mostly of senior secured loans (90.8%) to mostly upper middle market companies in mainly non-cyclical industries, as of June 30, 2023. The ratings also reflect the company’s solid management team, which has a long track record of working within the private debt markets with each member of the Investment Committee having an average of over 30 years of experience in the industry. Additionally, as a private company that was formed prior to regulatory reform in 2018, the company maintains a more restrictive asset coverage of 200% rather than the current regulatory requirement of 150%. As such, gross leverage remains low at 0.71x, well in excess of the 1.0x allowable which KBRA believes allows for increased volatility in an uncertain economic environment. As of June 30, 2023, the company had only two loans on non-accrual which comprised 0.53% and 0.37% of total investments at cost and fair value, respectively. KBRA believes OBDC II benefits from its solid underwriting and focus on portfolio companies in the upper middle market with EBITDAs in excess of $100 million during periods of economic uncertainty. OBDC II maintains a solid amount of unsecured debt to total debt at 50%, as of June 30, 2023. The strengths are counterbalanced by the potential risk related to the company’s illiquid investments, retained earnings constraints as a Regulated Investment Company (RIC), and an uncertain economic environment and geopolitical risks.

Blue Owl Capital Corporation II is an externally managed, non-diversified closed-end management investment company that has elected to be treated as a Business Development Company (BDC) under the 1940 Act and intends to elect to be treated as a RIC, which, among other things, must distribute to its shareholders at least 90% of the company’s investment company taxable income. The company was formed as a Maryland Corporation in October 2015 and began operating in April 2017. The company is managed by Blue Owl Credit Advisors LLC, an indirect subsidiary of Blue Owl Capital, Inc. (NYSE: OWL), which had approximately $157 billion of asset under management, as of September 30, 2023. The company’s investment strategy coincides with the strategies of Blue Owl Capital Corporation (KBRA Issuer/Senior Unsecured Debt ratings of BBB/Positive Outlook), Blue Owl Capital Corporation III (KBRA Issuer/Senior Unsecured Debt ratings of BBB/Stable Outlook), and Blue Owl Credit Income Corp. (KBRA Issuer/Senior Unsecured Debt ratings of BBB/Stable Outlook).

Rating Sensitivities

Given the Positive Outlook, the company’s ratings could be upgraded in the medium term provided that its credit metrics remain solid despite an uncertain economic environment amid higher interest rates, inflation, and geopolitical risks. A rating downgrade and/or Outlook change to Stable or to Negative could be considered if there is a significant downturn in the U.S. economy with negative impact on OBDC II’s earnings performance, asset quality, and leverage. A significant change in senior management and/or risk management policies could also lead to a negative rating action.

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