BLUE OWL CAPITAL CORPORATION
Fitch Ratings has affirmed
The Rating Outlook is Positive.
The 'BBB' rating and Positive Outlook assigned to
Today's rating actions have been taken as part of a broader review of business development companies (BDCs), which included 18 publicly rated firms. For more information on the peer review, please refer to 'Fitch Ratings Completes 2023 BDC Peer Review,' available at www.fitchratings.com.
Key Rating Drivers
The ratings affirmation reflects ORCC's access to investment resources from Blue Owl, experienced management team, senior investment focus, solid asset quality, strong funding flexibility, sound liquidity, and appropriate asset coverage cushion.
Rating constraints include ORCC's above-average exposure to paid-in-kind (PIK) income and potential constraints on operational flexibility resulting from ORCC's significant size, relative to other BDCs. For example, at certain points in the cycle, ORCC may be more challenged to identify sufficient investment opportunities to invest proceeds from repayments, which could pressure dividend coverage. ORCC's size may also limit capital markets' capacity to provide it with sufficient unsecured financing.
Rating constraints for BDCs more broadly include the market impact on leverage, given the need to fair-value the portfolio quarterly, dependence on access to the capital markets to fund growth and a limited ability to retain capital due to distribution requirements. Additionally, Fitch believes BDCs will experience weaker asset quality metrics in 2023 amid higher interest rates and slower growth at portfolio companies.
First lien loans comprised 71.4% of ORCC's portfolio at fair value at
ORCC generated modest net realized gains of
Fitch believes non-accruals could rise as some portfolio companies' performance will be challenged by higher interest rates and/or slower growth, but expects ORCC's credit performance to benefit from its focus on larger companies within the middle market. The weighted average annual EBITDA of ORCC's underlying portfolio (excluding investments that fall outside its typical borrower profile) was
ORCC's net investment income (NII) amounted to 4.3% of the average portfolio at cost in 2022 and improved to 5.0% (annualized) in 4Q22 as the benefits of higher interest rates were realized. Fitch expects ORCC's NII to continue to benefit from higher investment yields in 2023. The weighted average yield of ORCC's accruing debt and income-producing securities at cost improved to 11.5% at YE22 from 7.9% at YE21.
ORCC's leverage (par debt-to-equity) was 1.27x at YE22, or 1.21x net of unrestricted cash, which is towards the higher end of ORCC's targeted range of 0.9x-1.25x. The leverage ratio implied an asset coverage cushion of 16.2%, which is within Fitch's 'bbb' category leverage benchmark range of 11%-33%. Fitch expects ORCC will maintain the covenant cushion at an appropriate level to account for valuation volatility and/or future losses.
Fitch views ORCC's funding profile as strong given its demonstrated access to the institutional bond and collateralized loan obligations markets over time. Unsecured debt represented 56.1% of total debt outstanding at YE22, which was above-average and within Fitch's 'a' category benchmark range of 50%-90%. ORCC's next unsecured debt maturity is in
Beginning in 4Q22, ORCC revised its dividend policy to include a base dividend and a variable supplemental dividend to be paid quarterly. Fitch views the new dividend framework favorably as it should help improve consistency of dividend coverage during periods when earnings are pressured. ORCC's NII coverage of regular dividends declared was solid at 112.2% in 2022. Adjusting for net non-cash interest income, cash earnings coverage of regular dividends declared was weaker at 87.1% in 2022.
PIK income (including PIK dividends) represented 11.8% of interest and dividend income in 2022, which was above-average and up from 6.5% in 2021. ORCC's management team noted the vast majority of its PIK income was structured into deals at the time of investment and not resulting from credit problems. Fitch would view an inability to reduce PIK and/or demonstrate strong collections of accrued PIK in cash negatively.
The Positive Rating Outlook reflects ORCC's solid execution, which has resulted in strong funding diversity, below-average net realized loss rates and a strong competitive positioning. Fitch could upgrade ORCC's ratings if the firm demonstrates better-than-peer credit performance over the Rating Outlook horizon.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A sustained increase in leverage above the targeted range, deterioration of the portfolio risk profile, such that first lien positions declined materially as a proportion of the overall portfolio, without a commensurate decline in leverage, a sustained meaningful increase in non-accrual levels; meaningful realized losses, a sustained decline in unsecured debt below 40% of total debt outstanding, an impairment in the firm's liquidity profile or continued increases in PIK income without a demonstrated ability to collect PIK in cash could result in negative rating momentum, including a revision of the Rating Outlook back to Stable.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
ORCC's ratings could be upgraded if the firm demonstrates strong and differentiated credit performance over the Rating Outlook horizon, evaluated in combination with the consistency of ORCC's operating performance, asset quality metrics, investment valuations and underlying portfolio metrics. An upgrade would also be conditioned upon the maintenance of sufficient liquidity, solid dividend coverage, leverage levels commensurate with the risk profile of the portfolio, and unsecured debt representing at least 40% of total debt outstanding.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
The alignment of the unsecured debt rating and secured debt rating with that of the Long-Term IDR reflects solid collateral coverage for all classes of debt given that ORCC is subject to a 150% regulatory asset coverage requirement and has a meaningful unsecured funding component.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
The secured and unsecured debt ratings are primarily linked to the Long-Term IDR and are expected to move in tandem. However, a material reduction in unsecured debt as a proportion of total debt could result in the unsecured debt rating being notched down from the IDR.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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