DBRS Morningstar Upgrades Blue Owl Credit Income Corp.’s Long-Term Ratings to BBB from BBB (low), Stable Trend

DBRS, Inc. (DBRS Morningstar) upgraded the Long-Term Issuer Rating and Long-Term Senior Debt Rating of Blue Owl Credit Income Corp. (OCIC or the Company) to BBB from BBB (low). The trend on the ratings has been revised to Stable from Positive. The Company’s Intrinsic Assessment (IA) is BBB, while its Support Assessment is SA3, resulting in the Company’s final rating being equalized with its IA.

KEY CREDIT RATING CONSIDERATIONS
The ratings upgrade reflects OCIC’s strong operating performance combined with its substantial scale, diversified funding sources and conservative leverage. Over the past year, OCIC has consistently grown its investment portfolio by over 50% to $13.1 billion, while increasing its equity base to $6.7 billion at 2Q23 during a lender-friendly origination market of higher interest rates, solid loan documentation, and lower portfolio company loan-to-values. The ratings benefit from the broad franchise underpinned by OCIC’s investment advisor, Blue Owl Credit Advisors LLC (the Advisor), an indirect subsidiary of Blue Owl Capital Inc. (Blue Owl).

The ratings upgrade also considers the improvement in earnings, including a weighted average yield of the total investment portfolio at fair value of 11.4% at 2Q23 that helped generate $357.2 million of net investment income for 1H23, up from $111.7 million at 1H22. Credit performance has been better than expected given the broader macroeconomic environment, with only one investment on non-accrual, representing less than 0.1% of the investment portfolio at cost. OCIC has continued to diversify funding, demonstrating a willingness and ability to re-open the BDC debt markets with a $500 million issuance in June. Pro-forma for its $150 million add-on issuance in July, the unsecured debt mix was approximately 39%, and we expect it to remain around that level, given the increased pace of equity inflows.

The Stable trend considers the potential for a weakening economic environment as well as uncertainties in the U.S. banking system leading to a pullback in bank lending, which may benefit OCIC as it has ample equity inflows and capacity to continue growing its investment portfolio in a lender-friendly origination market. OCIC’s portfolio companies are primarily upper middle market borrowers with large scale and diversified revenues that should be better positioned to navigate deteriorating economic conditions compared to smaller borrowers. These origination tailwinds are balanced by the limited sponsor-driven M&A volume and leverage discipline.

CREDIT RATING DRIVERS
Over the longer-term, strong operating performance, continued funding diversification and a conservative leverage profile would result in an upgrade of the ratings. Conversely, a meaningful increase in non-accrual investments or a sizeable loss that materially reduces the Company’s cushion to regulatory leverage requirements would lead to a ratings downgrade.

CREDIT RATING RATIONALE
Franchise Strength – Good

DBRS Morningstar views OCIC’s leading franchise as underpinned by the Advisor, an indirect subsidiary of Blue Owl, a global alternative asset manager with $150 billion of assets under management providing private capital solutions. Blue Owl has a track record of managing multiple scaled direct lending investment vehicles, which has helped OCIC raise substantial equity from investors and access private credit opportunities from a broad origination funnel. With OCIC’s scale and co-investment exemptive relief, it is able to lead large transactions while maintaining portfolio diversity and limit concentration risk.

Earnings Power – Moderate

OCIC’s earnings have improved with higher overall base rates for an investment portfolio that is predominantly private credit originations (approximately 12% invested in BSLs at 2Q23). Net change in net assets (net income) was $428.2 million for 1H23 compared to a loss of $80.2 million at 1H22 when unrealized losses constrained earnings, though OCIC still generated $218.3 million in net income for the full year 2022. We expect investment yields and earnings generation to be near peak levels given interest rate movements and the forward curve.

Risk Profile – Good / Moderate

The Company’s risk profile is acceptable as its credit performance is strong with only one portfolio company on non-accrual of 242 total portfolio companies at 2Q23. We expect some credit deterioration to occur in the medium-term as the portfolio continues to season. However, OCIC focuses on sponsor-owned upper middle market companies which should be more adept at handling the broad macroeconomic challenges from lower profit margins and higher borrowing costs than smaller firms. OCIC’s core direct lending portfolio companies have a weighted average annual revenue of $939.0 million, weighted average EBITDA of $215.8 million and an average interest coverage of 2.1x at 2Q23.

Funding and Liquidity – Moderate

The funding and liquidity profile of OCIC continues to improve as the Company issued in both the CLO and unsecured debt markets in significant size over the past year. As part of the Blue Owl platform, OCIC has entrenched relationships with financial institutions that provide substantial capital to fund originations through participating in its revolving credit facility and asset-based facilities. We expect its access to funding will remain a competitive advantage as the Company has strong equity inflows and requires excess available capacity for unfunded commitments and new originations.

Capitalization – Moderate

OCIC’s capitalization is solid as it operates within its stated target net leverage range of 0.90x to 1.25x debt-to-equity. Gross debt-to-equity was 1.00x at 2Q23, comfortably inside of regulatory limits of 2.0x. Importantly, we view the leverage target and current level as having sufficient cushion to the asset coverage ratio (ACR) regulatory limit to absorb potential valuation volatility driven by its exposure to BSL investments which may have wider fair value marks. At 2Q23, we estimate OCIC’s cushion to the regulatory limit at approximately $3.3 billion, implying that the Company would need to incur a loss of approximately 25% of its portfolio to breach the buffer to the ACR.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (July 4, 2023) at https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (September 1, 2023): https://www.dbrsmorningstar.com/research/420144/global-methodology-for-rating-non-bank-financial-institutions. Other applicable methodologies include DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (July 4, 2023): https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

The primary sources of information used for this rating include Morningstar Inc. and Company Documents. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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