DBRS Morningstar Upgrades Blackstone Private Credit Fund’s Long-Term Ratings to BBB (high) from BBB, Revises Trend to Stable

DBRS, Inc. (DBRS Morningstar) upgraded the Long-Term Issuer Rating and Long-Term Senior Debt rating of Blackstone Private Credit Fund (BCRED or the Company) to BBB (high) from BBB. The trend on the ratings has been revised to Stable from Positive. The Company’s Intrinsic Assessment (IA) is BBB (high), 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 is supported by BCRED’s earnings strength driven by its industry-leading scale, credit performance, diversified funding and conservative balance sheet leverage. BCRED has the largest investment portfolio across the business development company (BDC) industry at $47.7 billion with $23.8 billion of equity at 2Q23, which generates significant net investment income, particularly with higher prevailing base rates. The ratings also benefit from the strong franchise of BCRED’s external investment advisor, Blackstone Credit BDC Advisors LLC (the Advisor), an affiliate of Blackstone.

The ratings upgrade reflects BCRED’s solid operating performance, with a weighted average yield of the total investment portfolio at fair value of 11.7% at 2Q23 that generated $1.4 billion of net investment income for 1H23, up from $770 million at 1H22. With just 0.3% of the investment portfolio at cost on non-accrual at June 30, 2023, credit performance has been sound despite broad economic uncertainty and the higher rate environment. BCRED’s funding profile remains diversified, with well-laddered maturities and unsecured debt mix comprising 35% of the capital stack.

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 BCRED with a continuing shift to private direct lending from banks and syndicated markets. BCRED has a large equity base with the capacity to originate in a lender-friendly market of higher interest rates, stronger loan covenants, and lower portfolio company leverage. BCRED’s portfolio companies are primarily upper middle market borrowers with 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 prevailing 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 a ratings upgrade. 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. Should the Company choose to operate well above its stated target leverage range of 1.00x to 1.25x debt-to-equity, the ratings would be downgraded.

CREDIT RATING RATIONALE
Franchise Building Block (BB) Assessment: Strong / Good

BCRED’s strong franchise is underpinned by the Advisor, an affiliate of Blackstone, an alternative asset manager which has reached $1 trillion of AUM across multiple investment strategies including private equity, real estate and credit and insurance with over 3,100 unique corporate credit issuers covered. The Credit & Insurance business (BXCI) was combined in 2023 as Blackstone’s fastest growing segment with $295 billion in AUM at 2Q23. BXCI offers one-stop financing across corporate and asset-based as well as investment grade and non-investment grade private credit. As part of the BXCI product offering, BCRED is able to lead ever-larger (+$1 billion) transactions as the upper middle market financing market shifts from syndicated offerings towards private credit lenders. With co-investment exemptive relief and scale, BCRED can maintain its portfolio diversity and limit concentration risk even with these sizeable transactions.

Earnings Building Block (BB) Assessment: Moderate

The Company’s earnings power has improved as the investment portfolio is comprised mostly of private credit assets (approximately 89% at 2Q23) combined with higher prevailing interest rates. Net change in net assets (net income) was $1.4 billion for 1H23 compared to a loss of $191 million at 1H22, which was driven by net realized and unrealized depreciation of $961 million. For full year 2022, BCRED still generated $633 million of net income from higher yielding assets. We expect investment yields and earnings generation to be near peak levels for BDCs given base rates have increased over 400 basis points over the past year, combined with forward curve expectations, and expect industry earnings to moderate in 2024.

Risk Building Block (BB) Assessment: Good / Moderate

BCRED’s credit performance has been strong with only two portfolio companies on non-accrual of 511 total portfolio companies at 2Q23, though we expect credit deterioration to occur in the medium-term as the investment portfolio matures. BCRED invests in predominantly sponsor-backed upper middle market companies which should be better able to face macroeconomic challenges from constrained profit margins and higher borrowing costs than smaller firms. BCRED’s portfolio companies’ weighted average EBITDA was $209 million at 2Q23, up from $167 million at 2Q22, with 4% of the investment portfolio at less than 1.0x interest coverage, and an average of 1.7x across the investment portfolio at 2Q23.

Funding and Liquidity Building Block (BB) Assessment: Good / Moderate

BCRED has a broad and diversified funding profile that benefits from its Advisor’s established relationships with financing providers and institutional investors. At 2Q23, BCRED had $24.4 billion of debt outstanding ($35.1 billion of commitments to BCRED) comprised of a corporate revolver (5%), asset-based SPVs (45%), unsecured bonds (35%), and CLOs (14%). With strong equity inflows, BCRED’s robust access to financing facilities and the unsecured debt markets is a competitive advantage to help maintain its leverage levels and deal flow origination capacity.

Capitalization Building Block (BB) Assessment: Moderate

BCRED operates within its stated target leverage ratio of 1.00x to 1.25x debt-to-equity, with gross debt-to-equity of 1.02x at 2Q23, well inside of the regulatory limit of 2.0x. The Company anticipates operating near the bottom of its range over the near-term, which is supportive of the rating. 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 than private credit investments. At 2Q23, we estimate the Company’s cushion to the regulatory limit at approximately $11.6 billion, implying that the Company would need to incur a loss of approximately 24% 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. In addition DBRS Morningstar uses the 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 in its consideration of ESG factors..

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.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings:

The last credit rating action on this issuer took place on November 7, 2022, when the long-term ratings were confirmed at BBB and the trend was revised to Positive from Stable.

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 credit ratings are monitored.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Watson Tanlamai, Vice President – Global FIG
Rating Committee Chair: David Laterza, Senior Vice President, Head of U.S. NBFI, Global FIG
Initial Rating Date: May 24, 2021

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

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