KBRA Assigns Rating to Blue Owl Technology Finance Corp. II's $700 Million Senior Unsecured Notes
March 28 2024 - 1:31PM
Business Wire
KBRA assigns a rating of BBB to Blue Owl Technology Finance
Corporation II’s (“OTF II” or “the company”) $700 million, 6.750%
senior unsecured notes due 2029. The rating Outlook is Stable. The
proceeds will be used for general corporate purpose, including the
repayment of debt.
Key Credit Considerations
The rating reflects the company’s ties to the sizeable $84.6
billion Blue Owl Capital, Inc. (NYSE: OWL) direct lending platform,
the derived benefits from OTF II’s SEC exemptive relief to
co-invest with other funds managed by the advisor and its
affiliates, and its diversified $3.8 billion investment portfolio
with 80.7% of the portfolio composed of senior secured first lien
loans to upper middle market companies in technology-related
industries. The company's traditional finance portfolio, with
weighted average EBITDA and enterprise value of $214 million and $5
billion, respectively, comprised 82.6% of total investment as of
December 31, 2023. OTF II’s growth capital portfolio comprised
13.2% of the investment portfolio and had a weighted average
enterprise value of $12.8 billion. The top three sector exposures
by end market were Systems Software (28.0%), Application Software
(15.8%), and Diversified Financial Services (9.5%).
Further supporting the rating is OTF II’s strong management team
with a long track record of working within the private debt
markets, with each member of the Investment Committee having an
average of over 30 years of experience in the industry. The company
has a team of approximately 30+ tech-dedicated investment
professionals and maintains an office in Menlo Park, CA as well as
New York City. Due, in part, to the company’s unseasoned portfolio,
the company has no loans on non-accrual status and 99.1% of the
company’s investment portfolio maintains an internal risk rating of
1 or 2, its highest classifications out of 5. As of 4Q23, gross
leverage was adequate at 1.13x with regulatory asset coverage of
188%, allowing for a solid cushion over its 150% regulatory asset
coverage requirement and within its target leverage of 0.90x to
1.25x. The company’s funding profile is diversified, and the
additional unsecured debt issuance will boost the company’s senior
notes as a percentage of total debt and increase financial
flexibility. A significant percentage of the company’s outstanding
debt includes its fully drawn $800 million subscription facility
that is secured by the company’s capital commitments. As of 4Q23,
the company’s liquidity is solid with $2.4 billion of uncalled
capital, ~$633 million of available bank lines, and $65 million
cash. There are no near-term debt maturities and unfunded
commitments totaled $353 million.
The strengths are counterbalanced by the potential risk related
to the company’s illiquid investments as a BDC and its unseasoned
investment portfolio stemming from its recent formation (October
2021), as well as retained earnings constraints as a Regulated
Investment Company (RIC) and the uncertain economic environment and
geopolitical risks.
Blue Owl Technology Finance Corp. II is a private, externally
managed, non-diversified closed-end management investment company
that has elected to be treated as a Business Development Company
(BDC) under the 1940 Act and to be treated as an RIC, which, among
other things, must distribute to its shareholders at least 90% of
the company’s investment company taxable income. The company was
formed in October 2021 as a Maryland Corporation and commenced
operations in January 2022. The company is managed by Blue Owl
Technology Credit Advisors II LLC, an affiliate Blue Owl Capital,
Inc., which had approximately $165+ billion of AUM as of December
31, 2023. The company’s investment strategy coincides with the
strategy of Blue Owl Technology Finance Corp. (KBRA Issuer/Senior
Unsecured Debt ratings of BBB/Stable Outlook) and Blue Owl
Technology Income Corp. (KBRA Issuer/Senior Unsecured Debt ratings
of BBB/Stable Outlook). Blue Owl’s technology lending products had
approximately $20.0 billion of AUM as of December 31, 2023.
Rating Sensitivities
A rating upgrade is not expected in the near-term. The Stable
Outlook could be revised to Positive if OTF II’s asset quality
remains solid, despite the company’s rapid growth, and leverage
metrics remain appropriate for the company’s risk profile. A rating
downgrade and/or Outlook change to Negative could be considered if
there is a significant downturn in the U.S. economy with negative
impact on OTF II’s earnings performance, asset quality, and
leverage. A significant change in senior management and/or risk
management policies could also lead to negative rating action.
To access rating and relevant documents, click here.
Methodologies
- Financial Institutions: Finance Company Global Rating
Methodology
- ESG Global Rating Methodology
Disclosures
A description of all substantially material sources that were
used to prepare the credit rating and information on the
methodology(ies) (inclusive of any material models and sensitivity
analyses of the relevant key rating assumptions, as applicable)
used in determining the credit rating is available in the
Information Disclosure Form(s) located here.
Information on the meaning of each rating category can be
located here.
Further disclosures relating to this rating action are available
in the Information Disclosure Form(s) referenced above. Additional
information regarding KBRA policies, methodologies, rating scales
and disclosures are available at www.kbra.com.
About KBRA
Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit
rating agency registered with the U.S. Securities and Exchange
Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is
registered as a CRA with the European Securities and Markets
Authority. Kroll Bond Rating Agency UK Limited is registered as a
CRA with the UK Financial Conduct Authority. In addition, KBRA is
designated as a designated rating organization by the Ontario
Securities Commission for issuers of asset-backed securities to
file a short form prospectus or shelf prospectus. KBRA is also
recognized by the National Association of Insurance Commissioners
as a Credit Rating Provider.
Doc ID: 1003698
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Analytical Contacts
Teri Seelig, Managing Director (Lead Analyst) +1 646-731-2386
teri.seelig@kbra.com
Kevin Kent, Director +1 301-960-7045 kevin.kent@kbra.com
Joe Scott, Senior Managing Director (Rating Committee Chair) +1
646-731-2438 joe.scott@kbra.com
Business Development Contact
Constantine Schidlovsky, Senior Director +1 646-731-1338
constantine.schidlovsky@kbra.com