KBRA Affirms Ratings for Blue Owl Capital Corporation III
21 Sep 2023 | New York
KBRA affirms the BBB issuer and senior unsecured debt ratings for Blue Owl Capital Corporation III (“OBDC III” or “the company”), formerly Owl Rock Capital Corporation III. The Outlook for the ratings is Stable.
Key Credit Considerations
The ratings reflect the company’s ties to the solid $73.8 billion Blue Owl direct lending platform, the derived benefits from OBDC III’s SEC exemptive relief to co-invest with other Blue Owl direct lending companies, and its diversified $3.5 billion investment portfolio with a focus on senior secured first lien loans (77.4%) to upper middle market companies with a weighted average EBITDA of $194 million that falls within the typical borrower profile (82.8% of total) as of June 30, 2023. The portfolio is concentrated in non-cyclical sectors with the top three industry concentrations Internet Software and Services (17%), Insurance (10%), and Healthcare Providers and Services (8%). The ratings also reflect the company’s relatively appropriate gross leverage of 0.91x with regulatory asset coverage of 208%, leaving a solid asset coverage cushion. KBRA believes that the company’s targeted leverage metric of 0.90x to 1.25x would allow the company to absorb increased volatility in less favorable market conditions. 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 25 years of experience in the industry. The company’s non-accruals remain low at 0.3% of total investments at cost and fair value, reflecting only one portfolio company on non-accrual. Furthermore, 95% of the company's loans are internally risk rated a 1 or 2, performing at or above expectations. The company’s unsecured debt to total debt outstanding was solid at 48%, up from 25% a year ago, reflecting the company’s solid access to the debt capital market through multiple debt issuances. OBDC III maintains adequate liquidity with $532.8 million of cash and bank lines available with no short-term debt maturities and $241 million of unfunded commitments as of June 30, 2023. The strengths are counterbalanced by the potential risk related to the company’s illiquid investments as a BDC, and its unseasoned investment portfolio stemming from its recent formation in 2020, as well as retained earnings constraints as a Regulated Investment Company (RIC).
OBDC III 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 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 is externally managed by Blue Owl Credit Advisors LLC, an affiliate of Blue Owl (NYSE: OWL), which had approximately $150 billion of AUM as of June 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 II (KBRA Issuer/ Senior Unsecured Debt Ratings of BBB/ Positive Outlook) and Blue Owl Credit Income Corporation (KBRA Issuer/ Senior Unsecured Debt ratings of BBB/ Stable Outlook).
In the near future, a rating upgrade is not expected. The Stable Outlook could be revised to Positive if OBDC III’s asset quality remains solid despite the company’s rapid growth and leverage metrics remain appropriate for the company’s risk profile. A rating downgrade and/or Outlook change to Negative could be considered if there is a significant downturn in the U.S. economy with negative impact on OBDC III’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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