KBRA Upgrades Ratings for Blue Owl Capital Corporation III

KBRA upgrades the issuer and senior unsecured debt ratings to BBB+ from BBB for Blue Owl Capital Corporation III (NYSE: OBDE or "the company"). The Outlook for the ratings is Stable.

Key Credit Considerations

The upgrade and ratings are supported by OBDE'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. OBDE'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 ("Adviser") and its affiliates. The company has a diversified $4.3 billion investment portfolio to 207 companies with a focus on senior secured first lien loans (85%) to upper middle market companies in less cyclical sectors as of June 30, 2024. For traditional financing (88.6% of total debt investments), excluding joint ventures and certain investments that fall outside of the typical borrower profile of total debt investments), weighted average annual EBITDA and revenue were $214 million and $989 million, respectively.

The ratings also reflect the company's solid access to the capital markets along with its comparatively stronger funding profile among KBRA rated BDCs. The already diverse funding profiles of OBDE and other Blue Owl BDCs have been further enhanced in recent periods. Funding sources include committed secured bank facilities, a CLO and senior unsecured notes. The company's percentage of unsecured senior debt to total debt outstanding is adequate at 33%, providing financial flexibility and less encumbered assets for the benefit of senior unsecured noteholders. The company has comfortable liquidity with $285 million of available credit lines and $200 million of unrestricted cash set against $142 million of debt maturing within the next two years. The company's unfunded commitments were $541 million, mostly tied to transactions and covenants that are not expected to be drawn. As of June 30, 2024, OBDE's gross leverage was 1.28x with net leverage of 1.22x, within the company's target leverage of 0.9x to 1.25x, which is consistent with the Blue Owl Credit platform and well with regulatory asset coverage requirement of 2:1. Credit quality is solid with non-accruals as a percentage of total investments at cost and FV of 0.84% and 0.49%, respectively. While the portfolio remains unseasoned, 95.1% of the portfolio maintains an internal performance rating of 1 or 2, signifying that the loans are performing at or above expectations at underwriting. While the portfolio is unseasoned, KBRA expects non-accruals to remain well within peer averages as it operates through these uncertain economic times. The company's profitability has been solid. 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.

In August 2024, the company announced that it has entered into a definitive merger agreement with Blue Owl Capital Corporation (NYSE: OBDC) with OBDC as the surviving entity. Pending shareholder approval, the merger is expected to close in 1Q25 and will result in total investments of $17.7 billion making it the 2nd largest publicly traded BDC. With 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.

The strengths are counterbalanced by the potential industrywide risks related to the company's illiquid investments, an unseasoned portfolio, 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 OBDE and other Blue Owl BDCs will remain comparatively resilient.

Blue Owl Capital III is a publicly traded New York based, externally managed, non-diversified closed-end management investment company that has elected to be treated as a business development company (BDC) under the Investment Company Act of 1940. For tax purposes, the company has elected to be treated as a regulated investment company (RIC). The company commenced operations in June 2020 and was publicly listed on the NYSE in January 2024. The company is externally managed by Blue Owl Credit Advisors LLC ("Adviser"), an indirect subsidiary of Blue Owl Capital, Inc. (NYSE: OWL), a global alternative asset manager with ~$192 billion of Assets Under Management (AUM). The company shares its diversified investment strategy and maintains SEC co-investment relief with Blue Owl Capital Corporation (KBRA Issuer / Senior Unsecured Debt ratings BBB+ / Positive Outlook), Blue Owl Capital Corporation II (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 impact on OBDE'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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