KBRA Upgrades Ratings for Blue Owl Capital Corporation

KBRA upgrades the issuer and senior unsecured debt ratings to BBB+ from BBB for Blue Owl Capital Corporation (NYSE: OBDC or "the company"). The Outlook for the ratings is revised to Stable from Positive in conjunction with the rating upgrade.

Key Credit Considerations

The upgrade and ratings are supported by OBDC's ties to the $95 billion Blue Owl Credit platform that maintains a strong reputation and leadership position in the $1.7 trillion private credit market. OBDC's experienced management team that has decades of experience working in the private markets has built a high credit quality direct lending platform to finance mainly sponsor-backed portfolio companies in the upper middle market. Management has implemented a comparatively favorable and comprehensive set of risk management tools to ensure solid liquidity, funding, and asset quality in less favorable markets. The company has SEC exemptive relief to co-invest with other funds managed by Blue Owl Credit Advisors LLC (the Adviser) and its affiliates, as well as the company's diversified $13.3 billion investment to 212 portfolio companies with a focus on senior secured first lien loans (75.4%) to mostly upper middle market companies in mainly less cyclical industries as of June 30, 2024. For traditional financing (87.4%), excluding the company's joint ventures and certain investments that fall outside the typical borrower profile, the weighted average annual EBITDA and revenue were $195 million and $876 million, respectively. 

The ratings also reflect the company's solid access to debt capital markets along with its comparatively stronger funding profile among KBRA rated BDCs. The already diverse funding profiles of OBDC and other Blue Owl BDCs have been further enhanced in recent periods. Funding sources include significant committed bank lines of credit, CLOs, and cost effective access to the senior unsecured note market. The funding structure provides significant financial flexibility and lower asset encumbrance with an unsecured debt to total debt ratio of 58%. The company has comfortable liquidity with $1.3 billion of available credit lines and $276 million of unrestricted cash set against $900 million of debt maturing within the next two years. The company's unfunded commitments were $1.8 billion, mostly tied to transactions and covenants and are not expected to be funded. The company's gross and net leverage were 1.26x and 1.19x at 2Q24, respectively, and below the company's net leverage target of 0.9x to 1.25x. KBRA views the company's asset coverage of 179% relatively conservative, allowing OBDC to absorb increased market volatility and a solid cushion to regulatory minium of 150% as of June 30, 2024. Credit quality remains relatively solid with non-accruals as a percentage of total investments at cost and fair value ( FV ) of 2.6% and 1.2% as of June 30, 2024. KBRA believes that OBDC benefits from the company’s solid underwriting and focus on portfolio companies in the upper middle market with EBITDA in excess of $100 million.

In August, the company announced that it has entered into a definitive merger agreement with Blue Owl Capital Corporation III (NYSE: OBDE) with OBDC as the surviving entity. Pending shareholder approval, the merger is expected to close in 1Q25 and will add about $4.4 billion to investments for a total of about $17.7 billion making it the 2nd largest publicly traded BDC. With about 93% of OBDE's assets overlapping with OBDC, low non-accruals and appropriate leverage, KBRA does not expect any significant change in credit metrics of the merged companies.

OBDC’s profitability has benefited from the rising interest rate environment with an asset sensitive balance sheet with the majority of its investments variable rate loans. Going forward, net investment income (NII) will be pressured from the Federal Reserve's path to cut interest rates along with competitive pressures. We expect NII and margins to decline from currently high levels but remain within our rating expectations.

The strengths are counterbalanced by the potential industrywide risks related to the company's illiquid investments, an unseasoned investment portfolio with high portfolio growth, retained earnings constraints as a Regulated Investment Company (RIC), and the potential for increased non-accruals with a more uncertain economic environment with high base rates, inflation, and geopolitical risk. KBRA believes that OBDC and other Blue Owl BDCs will remain comparatively resilient.

Blue Owl Capital Corporation 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 has elected to be treated as an RIC, which, among other things, must distribute to its shareholders at least 90% of the company’s taxable income. The company commenced operations in March 2016 and was publicly listed on the NYSE in July 2019. The company is managed by Blue Owl Credit Advisors LLC, an indirect subsidiary of Blue Owl Capital, Inc. (NYSE: OWL), which had approximately $192 billion of assets under management as of June 30, 2024. The company’s investment strategy coincides with the strategies of Blue Owl Capital Corporation II (KBRA Issuer/Senior Unsecured Debt ratings BBB+/Stable Outlook), Blue Owl Capital Corporation III (KBRA Issuer/Senior Unsecured Debt ratings BBB+/Stable Outlook), and Blue Owl Credit Income Corp. (KBRA Issuer/Senior Unsecured Debt ratings BBB+/Stable Outlook).

Rating Sensitivities

Given the rating upgrade, ratings are unlikely to be upgraded further in the medium term. A rating downgrade and/or Outlook change to Negative could be considered if there is a significant downturn in the U.S. economy with a greater-than-expected negative impact to OBDC's earnings performance, asset quality, and leverage. A significant change in senior management and/or risk management policies could also lead to negative rating action.

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