KBRA Assigns Rating to Blue Owl Technology Finance Corp. II's $75 million Senior Unsecured Notes due 2028

27 Sep 2023   |   New York


KBRA assigns a rating of BBB to Blue Owl Technology Finance Corp. II’s (“OTF II” or “the company”) $75 million 8.5% senior unsecured notes due September 27, 2028. The rating Outlook is Stable. The proceeds will be used for general corporate purposes, including the repayment of debt.

Key Credit Considerations

The rating reflects the company’s ties to the sizeable $73.8 billion Blue Owl direct lending platform, the derived benefits from OTF II’s SEC exemptive relief to co-invest with other funds managed by the advisor and its affiliates, and its diversified $3.0 billion investment portfolio with a focus on providing financing to technology focused upper middle market companies. The company’s investments classified as traditional financing comprised 79.8% of the debt portfolio while its investments classified as growth capital comprised 16% of the debt portfolio, as of June 30, 2023. Investments classified as traditional financing had a weighted average EBITDA and enterprise value of $189 million and $5.1 billion, respectively. Investments classified as growth capital had a weighted average enterprise value of $11.7 billion. First lien senior secured debt comprised 76.9% of total investments. The company’s top three industry concentrations were Systems Software (25%), Application Software (22%), and Diversified Financial Services (10%). The rating also reflects the company’s adequate gross leverage of 0.96x with regulatory asset coverage of 203%, generating a solid asset coverage cushion which KBRA believes should help OTF II absorb increased market volatility with higher interest rates and inflation in less favorable markets. OTF II had $4.1 billion of committed capital, of which approximately $2.6 billion remains uncalled, as of June 30, 2023. Around $53.3 million of the committed capital is from affiliated companies. 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. Additionally, the company has a team of approximately 25+ tech-dedicated investment professionals and maintains an office in Menlo Park, CA to support origination and risk management. The company had no non-accruals, as of June 30, 2023, partially due to the short operating period of fewer than two years ago. The company’s funding profile is diversified with $2.4 billion of committed debt facilities. Approximately 48% of the outstanding debt includes the mostly drawn $800 million subscription facility that is secured by the company’s capital commitments. This debt issuance will further diversify funding sources and increase financial flexibility. The company’s liquidity is solid with $2.6 billion of uncalled capital, $783 million of available bank lines, and $57 million of cash with no short-term debt maturities and unfunded commitments of $231 million at 2Q23. The strengths are counterbalanced by the potential risk related to the company’s illiquid investments as a BDC, its unseasoned investment portfolio stemming from its recent formation, and retained earnings constraints as a Regulated Investment Company (RIC).

Blue Owl Technology Finance Corp. II is a private, externally managed, non-diversified closed-end management investment company that has elected to be treated as a Business Development Company 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 was formed in October 2021 as a Maryland Corporation and commenced operations in December 2021. The company is managed by Blue Owl Technology Credit Advisors II LLC, an affiliate Blue Owl Capital, Inc. (NYSE: OWL), which had approximately $150 billion of AUM, as of June 30, 2023. The company’s investment strategy coincides with the strategy of Blue Owl Technology Finance Corp. (KBRA Issuer/Senior Unsecured Debt ratings of BBB/Stable Outlook) and Blue Owl Technology Income Corp. (KBRA Issuer/Senior Unsecured Debt ratings of BBB/Stable Outlook). Blue Owl’s technology lending products had approximately $17.7 billon of AUM, as of June 30, 2023.

Rating Sensitivities

In the near future, a rating upgrade is not expected. The Stable Outlook could be revised to Positive if OTF II’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 OTF II’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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