Morningstar DBRS Revises Blue Owl Credit Income Corp.'s Trend to Positive from Stable and Confirms Long-Term Credit Ratings at BBB

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

KEY CREDIT RATING CONSIDERATIONS
The trend revision to Positive from Stable incorporates OCIC's strong operating performance with improved funding diversification combined with a conservative leverage profile that continues to be well below regulatory asset coverage requirements. The Company's franchise strength and risk profile are also supportive of the trend revision.

The credit ratings confirmation reflects OCIC's strong franchise, underpinned by its investment advisor, Blue Owl Credit Advisors LLC (the Advisor), an indirect subsidiary of Blue Owl Capital Inc. (Blue Owl). Blue Owl is a global alternative asset manager that has grown to over $192 billion of assets under management (AUM) at June 30, 2024. Blue Owl provides private capital solutions across credit, real estate and GP strategic capital. OCIC's $22.2 billion investment portfolio, at fair value, is one of the largest pools of capital dedicated to direct lending, which has a weighted average total portfolio yield at fair value of 11.1%, generating significant earnings both at a net investment income (NII) and net change in net assets (net income) level. We do expect NII will moderate as base rates are poised to decrease as inflationary pressures subside. The credit ratings confirmation also considers the Company's sound asset performance to date with only two portfolio companies on non-accrual at 2Q24, consisting of less than 0.1% of the investment portfolio at cost. Funding and capitalization remain supportive of the credit ratings with OCIC's unsecured debt comprising 43% of its funding at 2Q24 with a gross debt-to-equity of 0.92x, within its 0.90x- 1.25x target range.

CREDIT RATING DRIVERS
The credit ratings would be upgraded with sound earnings and asset level credit performance while maintaining a conservative leverage profile. Conversely, meaningfully worse operating performance would lead to a revision of the trend to Stable. A material increase in non-accrual investments well above our expectations or operating with leverage substantially higher than its target range for a sustained period would result in a credit ratings downgrade.

CREDIT RATING RATIONALE

Franchise Strength Building Block (BB) Assessment: Good
OCIC's leading franchise is underpinned by the Advisor, an indirect subsidiary of Blue Owl, which has a track record of managing multiple scaled direct lending investment vehicles. OCIC is now Blue Owl's largest individual pool of capital focused on diversified direct lending and with a $22.2 billion investment portfolio, at fair value, is able to lead large transactions while managing portfolio diversity and concentration risk.

Earnings Power Building Block (BB) Assessment: Moderate
OCIC's earnings power has continued to strengthen as base rates remain higher-for-longer with a total weighted average yield of the investment portfolio of 11.1% as of 2Q24. Net investment income (NII) in 2023 and 1H24 was $819.1 million and $617.9 million, respectively, with net increase in net assets resulting from operations (net income) over the same periods was $1.0 billion and $590.8 million. Mark-to-market valuation fluctuations were minimized compared to the significant NII generated by the scaled investment portfolio. Payment-in-kind (PIK) interest and dividend income was $140.3 million for 2023 (9.1% of total investment income), and $90.9 million for 1H24 (7.9% of total investment income), higher than the 5% average of BDCs under our coverage universe, but in almost all instances PIK was structured at the initial underwrite. Payment on PIK is normally received only in the event of payoff, unlike cash interest income which is at risk if a portfolio company defaults. We expect business development companies (BDCs) earnings are at peak levels given potential interest rate decreases in the near-term as well as the potential increase in credit deterioration.

Risk Profile Building Block (BB) Assessment: Good / Moderate
Despite a limited track record given the meaningful investment portfolio ramp since 2021, the Company's risk profile is acceptable with only two investments on non-accrual consisting of less than 0.1% of investments at cost at 2Q24. OCIC's borrowers are large sponsor-owned companies with a weighted average EBITDA of $253 million, and the Company's investment portfolio is comprised of 87.8% first lien investments across 337 portfolio companies at 2Q24. The Company also has significant industry diversification, with the largest industry exposure to healthcare providers and services (12.5%) and internet software and services (12.0%) at 2Q24.

Funding and Liquidity Building Block (BB) Assessment: Good / Moderate
OCIC continues to be a leader among BDCs issuing into the unsecured market with significant fixed income investor relationships that helps drive demand with solid pricing levels. The Company's funding profile consists of over $13.0 billion of capacity comprised of a $2.0 billion revolving credit facility, seven SPV asset facilities, seven CLO issuances, and numerous unsecured issuances ranging in well-laddered maturities from 2025 through 2031. Unsecured funding comprised 43% of outstanding debt at 2Q24, and pro-forma for OCIC's $1.0 billion 5.8% unsecured issuance in September 2024, was at greater than 50%. At 2Q24, liquidity appeared tight consisting of $1.5 billion of available capacity and $540 million of cash compared to $3.1 billion of unfunded commitments. Subsequent to quarter-end, OCIC completed two securitizations for approximately $900 million, the aforementioned unsecured note issuance and an additional $437.8 million in gross equity subscriptions, supporting liquidity.

Capitalization Building Block (BB) Assessment: Moderate
Capitalization is solid as OCIC operates within its stated target net leverage ratio of 0.90x to 1.25x debt-to-equity. Gross debt-to-equity was 0.92x at 2Q24, comfortably inside of regulatory limits of 2.00x. Equity net inflows have been approximately $400 million per month, and importantly, we view the Company's leverage target and current level as having sufficient cushion to the asset coverage ratio (ACR) regulatory limit to absorb valuation volatility which may be driven by its increased exposure to BSL investments (approximately 22% at 2Q24). At 2Q24, the cushion was approximately $6.4 billion, implying that OCIC would need to take a full loss on 29% of its $22.2 billion investment portfolio to breach the ACR limit.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS   
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings at (August 13, 2024) at https://dbrs.morningstar.com/research/437781/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-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 4, 2024): https://dbrs.morningstar.com/research/438927/global-methodology-for-rating-non-bank-financial-institutions. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings https://dbrs.morningstar.com/research/437781/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-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://dbrs.morningstar.com/about/methodologies.

The primary sources of information used for this credit rating include Morningstar, Inc. and company documents. Morningstar DBRS considers the information available to it for the purposes of providing this credit 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.

Morningstar DBRS 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. Morningstar DBRS' outlooks and credit ratings are monitored.

For more information on this credit or on this industry, visit dbrs.morningstar.com.
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