Morningstar DBRS Assigns HPS Corporate Lending Fund's Long-Term Credit Ratings at BBB with a Positive Trend

DBRS, Inc. (Morningstar DBRS) assigned a Long-Term Issuer Rating and Long-Term Senior Debt rating of BBB to HPS Corporate Lending Fund (HLEND or the Company). The trend on all ratings is 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 credit ratings reflect HPS Corporate Lending Fund's (HLEND or the Company) established franchise in direct lending with its substantial scale and solid earnings power which has benefited from higher-for-longer base rates. Additionally, HLEND has a broad funding structure complemented by multiple issuances of public unsecured debt and CLOs while maintaining a conservative leverage profile well below its target range. The Company's risk profile is acceptable as credit performance remains resilient despite the potential for further credit deterioration as the investment portfolio matures. The rapid investment portfolio growth experienced over the past two years introduces a degree of vintage concentration, which is a modest constraint on the assessment of the Company's risk profile.

The credit ratings also consider HLEND's franchise strength, supported by its investment advisor, HPS Advisors, LLC (the Advisor), a wholly-owned subsidiary of HPS Investment Partners, LLC (HPS). On December 3, 2024, BlackRock and HPS announced their entry into a definitive agreement for BlackRock to acquire the business and assets of HPS for approximately $12 billion in BlackRock equity with an expected closing in mid-2025, subject to receipt of certain consents from investors in HPS funds and accounts, regulatory approvals and satisfaction of other customary closing conditions. If the transaction occurs, we expect the HPS management team will lead the combined private financing solutions business unit within BlackRock, with approximately $220 billion in client assets across private credit including senior and junior capital, asset-based finance, real estate, private placements and CLOs. We expect that HLEND will continue to be an important part of the private credit franchise, with an investment portfolio of $13.0 billion at Q3 2024, generating significant net investment income (NII) and net change in net assets from operations (net income), with a weighted average yield of 11.1% at fair value, as of Q3 2024. Asset performance remains sound with only five portfolio companies on non-accrual out of 276 companies, representing 0.4% of amortized cost of total debt investments at Q3 2024. Funding diversity and leverage discipline are supportive of the credit ratings with HLEND's unsecured debt comprising 36% of total funding at Q3 2024 with a gross debt-to-equity of 0.70x, well below its 1.00x - 1.25x target leverage range.

The Positive trend reflects our view that HLEND is well positioned to benefit from the BlackRock combination at the external-manager level from increased deal flow and enhanced access to capital. Despite declining base rates, we expect HLEND will be able to generate solid operating results even through modest credit deterioration while it operates at conservative leverage levels.

CREDIT RATING DRIVERS
Sound operating performance, continued funding diversification and maintaining a conservative leverage profile would result in an upgrade of the credit ratings. A material increase in non-accrual investments above expectations or a sizable loss that reduces the Company's capital buffer to regulatory requirements would result in a revision of the trend to Stable. Operating with significantly higher leverage than the target range would also result in a credit ratings downgrade.

CREDIT RATING RATIONALE

Franchise Strength Building Block Assessment: Strong / Good
HLEND's franchise strength is underpinned by its relationship with HPS, which invests in a broad array of both private and public credit strategies including direct lending, real estate, asset-based financing, junior capital and liquid credit, which we expect will be a core part of BlackRock's private credit platform post-acquisition closing. HPS has deep relationships with financial sponsors, banking counterparties and institutional investors which potentially widen HLEND's deal sourcing funnel and complement its ability to raise equity from investors. The scale of the $13.0 billion investment portfolio at 3Q 2024 combined with SEC co-investment exemptive relief with certain other HPS investment vehicles has enabled HLEND to lead large private credit transactions while maintaining portfolio diversity and limiting concentration risk, which we expect will further improve as part of BlackRock.

Earnings Power Building Block Assessment: Moderate
The Company's earnings have strengthened as higher-for-longer base rates supported peak level earnings from a scaled investment portfolio which is predominantly invested in direct originations (approximately 9% in liquid Level 2 assets, primarily comprised of BSLs at Q3 2024) with a weighted average yield of the total investment portfolio at 11.1% at fair value as of Q3 2024. NII in 2023 and 9M 2024 was $475.2 million and $545.9 million, respectively, while net income over the same periods was $654.6 million and $625.5 million, supported by high yields, positive mark-to-market gains and limited credit deterioration. We expect earnings to moderate in the near-term as interest rates gradually decrease and potential credit losses rise as the investment portfolio matures.

Risk Profile Building Block Assessment: Good / Moderate
HLEND's risk profile is considered acceptable, despite the Company's rapid portfolio growth and vintage concentration. The investment portfolio consists primarily of first lien investments (96% at Q3 2024) to upper middle market companies with a weighted average EBITDA of $206 million and a weighted average loan-to-value of 40% for the private credit portfolio at Q3 2024. At this scale, portfolio companies typically have diverse revenue streams and enhanced financial flexibility to be resilient to worsening economic conditions. The Company had five portfolio companies on non-accrual out of 276 issuers, representing 0.4% of the amortized cost of total debt investments at Q3 2024, though we expect some additional credit deterioration to occur in the medium-term as the portfolio continues to season. Payment-in-kind (PIK) interest income was $35.8 million for 2023 (4.0% of total investment income), and $52.9 million for 9M 2024 (5.2% of total investment income), below the 7.3% average of BDCs under our coverage universe. 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.

Funding and Liquidity Building Block Assessment: Moderate
HLEND has a diverse funding profile consisting of a revolving credit facility, five asset-backed SPV facilities, two CLO issuances and multiple unsecured debt issuances in both private placement and public markets. The debt has well-laddered maturities, with the nearest maturity in November 2025 for $170 million, and the revolving credit facility was last upsized in November 2024 to increase commitments to $1.525 billion. Unsecured debt comprised 36% of total funding at Q3 2024, with the Company targeting 30% - 40% of its funding as unsecured. Liquidity is sufficient, with $2.2 billion of available capacity subject to borrowing base limitations and $228.0 million of cash, compared to $1.7 billion of unfunded commitments at Q3 2024.

Capitalization Building Block Assessment: Moderate
Capitalization is solid with HLEND operating well below its target leverage ratio of 1.00x - 1.25x debt-to-equity, at 0.70x at Q3 2024, and comfortably inside of regulatory limits of 2.0x. Importantly, we see the Company's current leverage and target range as having sufficient cushion to the asset coverage ratio (ACR) regulatory limit to absorb potential valuation volatility from its investment portfolio. At Q3 2024, we estimate HLEND's cushion to the regulatory limit at approximately $5.1 billion, implying that the Company would need to incur a loss of approximately 39% of its investment 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 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 (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 (November 19, 2024): https://dbrs.morningstar.com/research/443208/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.
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