KBRA Upgrades Ratings for Blue Owl Credit Income Corp.

KBRA upgrades the issuer and senior unsecured debt ratings to BBB+ from BBB for Blue Owl Credit Income Corp. ("OCIC" or "the company"). The Outlook for the ratings is Stable.

Key Credit Considerations

The upgrade and ratings are supported by OCIC'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. OCIC'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 sponsored-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 the Adviser and its affiliates, as well as the company's diversified $22.2 billion investment portfolio to 337 companies with a focus on senior secured first lien loans (87.8%) to upper middle market companies in less cyclical sectors as of June 30, 2024. For traditional financing, excluding investments in OCIC SLF and certain investments that fall outside of the typical borrower profile (87.4% of total debt investments), weighted average annual EBITDA and revenue were $253 million and $1.1 billion, respectively. The company maintains a high percentage of level 2 assets at ~22%.

The ratings also reflect the company's solid access to capital through wealth channels and the debt capital markets along with its comparatively stronger funding profile among KBRA rated BDCs. The already diverse funding profiles of OCIC 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 ~53% on a pro-forma basis that includes its recent $1.0 billion issuance of senior unsecured notes. The company has comfortable liquidity with $1.5 billion of bank credit availability and $429.2 million of unrestricted cash set against $500 million of unsecured debt due (March 2025) and unfunded commitments of about $3.1 billion. With the recent $1.0 billion note issuance, liquidity and financial flexibility improve as a portion of the proceeds will be used to repay its outstanding secured bank debt. Additionally, a portion of the unfunded commitments are tied to covenants and transactions and are not expected to be drawn. Furthermore, as a continuously offered perpetual BDC, OCIC raises capital monthly and offers up to 5% of its shares for repurchase quarterly but is not required to do so if market conditions cause undue stress to operations. Since inception, OCIC raised significant equity totaling $12.2 billion through August 1, 2024. During 1H24, the company raised close to $3.0 billion of equity and tendered $294 million (10x). As a continuously offered perpetual BDC, the company does not plan a liquidity event.

KBRA views the company’s gross leverage as relatively conservative at 0.86x (net leverage 0.82x), below the company’s net debt-to-equity target range of 0.90x to 1.25x, and also views as prudent the company's asset coverage ratio of 209% allowing for a solid cushion to regulatory minimum of 150% as of June 30, 2024. KBRA believes that the company’s targeted leverage metrics would allow OCIC to absorb increased volatility in less favorable market conditions. Credit quality remains strong with just two portfolio companies on non-accrual status. Total non-accruals remain low at 0.05% and 0.03% of total investments at cost and FV, respectively, as of 2Q24. The company’s investment portfolio remains unseasoned with 97.7% of investments at FV having an internal risk rating of a 1 or 2, performing at or above the company’s initial underwriting expectations. While the portfolio is unseasoned, KBRA expects non-accruals to remain well within peer averages as it operates through these uncertain economic times.

Going forward, interest income will be pressured from the Federal Reserve's path to cut interest rates along with competitive pressures. We expect net investment income (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 OCIC and other Blue Owl BDCs will remain comparatively resilient.

Blue Owl Credit Income Corp. 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 an 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 on April 22, 2020, commenced operations on November 10, 2020, and is managed by Blue Owl Credit Advisors LLC ("Adviser"), affiliate of Blue Owl Capital, Inc. (NYSE: OWL), which had ~$192 billion of AUM as of June 30, 2024. The company’s investment strategy coincides with the strategies of Blue Owl Capital Corporation (KBRA Issuer/Senior Unsecured Debt ratings BBB+/ Stable Outlook), Blue Owl Capital Corporation II (KBRA Issuer/Senior Unsecured Debt Ratings BBB+ / Stable Outlook), and Blue Owl Capital Corporation III (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 on OCIC’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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