DBRS Morningstar Assigns Long-Term Ratings of BBB (low) to Blackstone Private Credit Fund; Trend Positive

DBRS, Inc. (DBRS Morningstar) has assigned a Long-Term Issuer Rating of BBB (low) and a Long-Term Senior Debt Rating of BBB (low) to Blackstone Private Credit Fund (BCRED or the Company). The trend on the ratings is Positive. The Company’s Intrinsic Assessment (IA) is BBB (low), while its Support Assessment is SA3.

KEY RATING CONSIDERATIONS
The ratings recognize the strong franchise supported by BCRED’s affiliation with Blackstone, a leading global alternative asset manager with $649 billion of assets under management (AUM) and a track record of over 30 years. Moreover, Blackstone is one of the largest global credit managers with more than $159 billion of AUM across multiple credit strategies. While BCRED is a newly formed business development company (BDC), its management team has a long history of investing in the private credit space, and has managed Blackstone Secured Lending Fund (BXSL), another privately listed BDC, since 2018. BCRED does not benefit from an explicit guarantee from Blackstone, though we see implicit support underpinning the ratings, particularly given that the credit platform is a focus growth area for Blackstone.

The ratings are constrained by BCRED’s initially limited earnings power as the investment portfolio continues to ramp up from investing in lower yielding broadly syndicated loan (BSL) assets into higher yielding private direct lending credit assets. While there is concentration risk in BCRED’s portfolio, this is mitigated by the strong risk management and underwriting of the Blackstone private credit platform, as well as that primarily all investments have been underwritten incorporating the potential downside from the pandemic. BCRED’s funding profile is narrow, given its reliance on secured forms of wholesale funding, but also benefits from Blackstone’s banking relationships to drive advantageous terms in its sizable credit facilities. We consider the Company’s leverage target as appropriate and supportive of the ratings.

The Positive trend reflects the underlying strength of the Blackstone franchise that should provide ample private direct lending credit investment opportunities allowing the Company to come closer to realizing its full earnings potential. DBRS Morningstar also views that some key sources of uncertainty related to the Coronavirus Disease (COVID-19) pandemic are behind us, contributing to the broader market certainty and investor conviction. Most businesses have adapted to social distancing practices and periodic government restrictions on activities that address recent waves in new virus cases. The successful vaccination roll-out to communities across the U.S. continues which should support a more permanent reopening of the economy. Consistent with our moderate economic scenario published May 4th, 2021, expectations are for a strong economic recovery in 2021, buffered by government stimulus and central bank actions that should produce robust origination pipelines for BDCs.

RATING DRIVERS
Given the Positive trend, demonstration by the Company of consistently good operating performance in line with expectations combined with improving diversity of funding sources that unencumbers the balance sheet would result in an upgrade of the ratings. On the other hand, indications that BCRED’s portfolio composition, operating performance, or leverage is worse than expectations would lead to a revision of the trend to Stable. A meaningful increase in non-accrual investments or a sizeable loss that materially reduces the Company’s cushion to the regulatory leverage covenants would lead to a ratings downgrade.

RATING RATIONALE
DBRS Morningstar views BCRED’s strong franchise as supported by, and reliant on, its external advisor, Blackstone Credit BDC Advisors LLC (the Advisor), an affiliate of Blackstone. Blackstone has a well-established investment management franchise with $159 billion dedicated to credit strategies and an investment track record of over 30 years. Blackstone has deep financial sponsor and banking counterparty relationships which provides BCRED strong access to deal flow and funding capabilities. Growing externally-managed vehicles is a core focus of the Blackstone platform, as it diversifies its earnings streams to higher quality, consistent fee-related revenue away from more volatile investment income.

BCRED was formed in 2020, structured to be a permanently non-listed, perpetual-life BDC which commenced operations in January 2021. The Company has rapidly grown its capital and investment portfolio to $2.1 billion in equity and a $5.4 billion investment portfolio at fair value as of March 31, 2021. Subsequent to quarter end, BCRED has raised an additional $1.8 billion of equity, for $4.0 billion of equity as of May 2021. BCRED focuses on privately originated, senior secured, floating rate loans to sponsor-backed middle market companies, which Blackstone defines as companies with $50 million - $2.5 billion in revenue. The Company has co-investment exemptive relief from the SEC which allows assets to be invested across Blackstone’s other managed investment vehicles. Blackstone also manages another BDC, Blackstone Secured Lending Fund (BXSL). BXSL has a longer track record of performance, having been established in October 2018, and provides some indication of performance for BCRED.

Earnings generation is limited, as BCRED’s portfolio is currently heavily weighted to lower yielding BSL assets. As the Company continues to rotate its investment portfolio, we expect to see improving returns. The Company’s investment portfolio was primarily originated in 2H20 and 1H21, so BCRED avoided the large 1Q20 unrealized losses that impacted other BDCs due to mark-to-market fluctuations related to the impact of the COVID-19 pandemic. Net investment income and net change in net assets (net income) for 1Q21 were solid at $26.2 million and $48.6 million, respectively.

The Company’s credit risk profile is considered moderate, but BCRED’s limited track record (notwithstanding the external advisor) and vintage concentration are ratings constraints. While there continues to be elevated growth of assets in a compressed period of time, the investments were primarily all underwritten during the pandemic. Given the Company’s focus on first lien, floating-rate upper middle market loans, as well as the diversified BSL portion of the portfolio, idiosyncratic portfolio company risk and interest rate risk is limited. There is elevated market risk driven by portfolio’s current exposure to BSLs, which as Level 2 assets have more valuation volatility from credit spreads than private credit investments. We consider the Company’s risk management systems and processes to be robust, benefiting from BCRED’s position within the larger Blackstone platform. None of BCRED’s investments were on non-accrual as of 1Q21, which is generally expected given the young age of the newly originated private credit portfolio and broadly syndicated loans.

BCRED’s funding profile is narrow, and would benefit from unsecured debt issuance. As a newly formed BDC, there are no substantial near term debt maturities, with the funding facilities generally at three year revolving terms followed by a two year term out period. Liquidity is strong with available liquidity comprised of $1.3 billion of available credit facility capacity and $119 million of cash at 1Q21, versus $500 million in unfunded commitments. As the Company continues to raise new equity at over $800 million per month and deploy it as the capital is raised, liquidity is fluid, especially when compared to other BDCs.

Capital is strong and the Company targets a leverage ratio of 1.00x to 1.35x debt to equity over the long-term, inside of regulatory limits of 2.0x. At March 31, 2021, BCRED’s leverage was at 0.91x, or 1.13x accounting for $1.6 billion of unsettled trades, and $997 million of new equity subscriptions to BCRED on April 1, 2021, which is inside of the Company’s target. Importantly, we see the leverage target and current leverage levels as having sufficient cushion to the asset coverage ratio (ACR) regulatory limit to absorb potential valuation volatility driven by the outsized exposure to BSL investments in the portfolio. Pro forma for the equity transfer in early April, we estimate BCRED’s cushion to the regulatory leverage limit at $1.3 billion, implying that BCRED would need to incur a loss on 25% of its investment portfolio to breach the buffer to the ACR.

Dividends have been covered through net investment income (111%), but this has been discounted given the limited history of operations and outsized investments in lower yielding BSL assets, expense reimbursements and management fee waivers. BCRED has demonstrated significant success in raising equity capital through broker-dealer wealth management distribution platforms, and at $4.0 billion of equity as of May 2021, is among the larger BDCs in the market. As a perpetually non-traded entity, BCRED's shares are less liquid than other publicly listed BDCs whose shareholders can sell stock in the open market. Expected liquidity for shareholders is on a quarterly basis, with repurchases at net asset value as of each quarter end, limited to 5% of the aggregate shares outstanding. However, as a BDC, the Company is still required to distribute 90% of its net investment income as dividends for tax purposes, and as such, this inherent inability to retain organic capital to support balance sheet growth is a ratings constraint for the BDC industry.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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 29, 2020): https://www.dbrsmorningstar.com/research/367510/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 (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are 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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