DBRS Morningstar Assigns Long-Term Ratings of BBB (low) to Owl Rock Core Income Corp. with a Stable Trend

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 Owl Rock Core Income Corp. (ORCIC or the Company). The trend on the ratings is Stable. The Company’s Intrinsic Assessment (IA) is BBB (low), while its Support Assessment is SA3, resulting in the Company’s final rating being equalized with its IA.

KEY RATING CONSIDERATIONS
The ratings are supported by the broader franchise strength of ORCIC’s investment advisor, Owl Rock Capital Advisors (the Advisor), an indirect subsidiary of Blue Owl and part of Owl Rock, the division of Blue Owl that focuses on direct lending. Blue Owl manages $62.4 billion of capital, split evenly between Dyal Capital, which provides capital solutions to institutional private equity and hedge fund managers through minority investments and long-term financing, and Owl Rock, which was founded in 2015 and provides private credit and financing offerings for sponsor-backed middle and upper middle market companies. While ORCIC is a new business development company (BDC) formed in 4Q20, its management team is well respected with an extended track record of investing in the private credit space, managing multiple other public and private BDCs, as well as other investment vehicles focused on direct lending. Though Owl Rock does not explicitly guarantee obligations of ORCIC, we view implicit support underpinning the ratings, given the strategic importance of the direct lending platform to Blue Owl.

ORCIC’s limited earnings power constrains the ratings, as the investment portfolio is currently overweighted in lower yielding broadly syndicated loans (BSLs) as it ramps up and rotates into higher yielding private credit assets over time. We expect BSLs to comprise approximately 10% to 20% of the overall investment portfolio once fully ramped to provide liquidity for potential share repurchases. Concentration and credit risk in ORCIC’s portfolio is managed by risk management and underwriting of Owl Rock’s platform. We note that credit performance within its other managed vehicles has been sound, including through the Coronavirus Disease (COVID-19) pandemic. The Company’s funding profile is fairly narrow, based on its reliance on secured forms of wholesale funding, though the benefits of the Owl Rock banking relationships are clear given its sizeable revolving credit facility. As the unsecured debt mix of its funding profile increases, we would view this as positive to the ratings. ORCIC’s leverage target of 0.90-1.25x debt to equity is appropriate given the nature of its underlying assets and is supportive of the ratings.

The Stable trend considers the strength of the Owl Rock franchise which should provide solid direct lending investment opportunities allowing ORCIC to migrate closer to realizing its earnings potential. DBRS Morningstar views that while emerging coronavirus variants and limited vaccine penetration in some areas continue to pose some level of risk, we anticipate a continuing economic recovery in 2H21 and 2022.

RATING DRIVERS
A successful transition into higher yielding private credit assets that leads to improved earnings while maintaining a similar risk profile and a conservative leverage profile would result in a ratings upgrade. Conversely, a meaningful increase in non-accrual investments, a sizeable loss that materially reduces the Company’s cushion to regulatory leverage requirements or significant weak performance in the investment portfolio which erodes net asset value (NAV) would lead to a ratings downgrade.

RATING RATIONALE
DBRS Morningstar views ORCIC’s strong franchise as reliant on the Advisor, an indirect subsidiary of Blue Owl, and part of Owl Rock’s direct lending platform. Blue Owl was formed in May 2021 through a SPAC transaction which merged Dyal Capital and Owl Rock into a public SPAC, creating an alternative investment manager with $62.4 billion of assets under management, half of which is dedicated to direct lending. Owl Rock has an established track record of successfully managing multiple direct lending vehicles, including a public BDC, Owl Rock Capital Corp. (ORCC), and multiple private BDCs, with Owl Rock Capital Corp. II (ORCC II) and Owl Rock Technology Finance (ORTF), as well as other investment vehicles. Through these other investment vehicles and its senior management’s past experience, Owl Rock has built deep relationships with financial sponsors, banking counterparties and institutional investors, which provides ORCIC ready access to deal flow and funding capacity. Owl Rock and its feeder funds have committed an aggregate of $275 million of capital (up to $250 million of debt and $25 million in equity) to ORCIC, further aligning its incentives.

ORCIC commenced operations in November 2020 and is structured as a permanently non-listed, perpetual-life BDC. The Company has a limited operating history, though it has begun to grow capital at a measured pace to $210 million of equity and $421 million investment portfolio as of June 30, 2021. Moreover, subsequent to quarter-end, ORCIC has further grown substantially. ORCIC’s investment focus is privately originated, senior secured floating rate loans to middle market and upper middle market companies, which Owl Rock defines as companies with $50 million - $2.5 billion in revenue, or $10 million - $250 million in EBITDA. This investment strategy is the same as its other diversified lending focused BDCs, ORCC and ORCC II (both established in 2015), which have longer track records of performance and provide an indication of potential operating performance for ORCIC when fully ramped.

The Company’s earnings generation is initially limited as its portfolio is heavily weighted towards lower yielding BSL assets, though as the portfolio rotates to privately originated direct lending assets, we expect to see an improving yield profile. The majority of ORCIC’s investment portfolio was originated in 2H20 and 2021, so ORCIC avoided the large unrealized losses due to mark-to-market fluctuations related to credit spreads widening at the onset of the coronavirus pandemic that affected the BDC industry and other direct lenders. Net investment income and net change in net assets (net income) for 2Q21 was nascent at $2.3 million and $3.1 million, respectively.

ORCIC’s risk profile is considered moderate, but the Advisor’s limited track record for this specific investment vehicle, and vintage concentration are constraints on the ratings. Since the Company commenced operations in November 2020, ORCIC has been able to factor in the potential impact of the pandemic when underwriting the majority of its loans. Credit risk is acceptable given the Company’s investment focus on middle market and upper middle market sponsor-backed companies with senior secured floating-rate loans. However, the ramped investment portfolio is expected to have 20-35% of non-first lien exposures, which is in line with Owl Rock’s other diversified lending BDC vehicles, but is a higher percentage than DBRS Morningstar’s BDC coverage universe. None of ORCIC’s investments were on non-accrual as of 2Q21, which is expected given its newly originated private credits and BSL assets. Interest rate risk is limited given the presence of interest rate floors, and the floating-rate nature of the loans. ORCIC’s elevated exposure to BSLs, as Level 2 assets, increases the potential for increased valuation volatility and market risk arising from changes in credit spreads relative to traditional private credit investments. The Company’s risk management processes appear robust, benefitting from the Advisor’s infrastructure, including middle and back office functions.

ORCIC’s funding diversity is narrow and primarily utilizing secured funding facilities and a promissory note from Owl Rock. The Company recently issued $350 million in an unsecured debt issuance due September 2026, which benefits the funding profile by unencumbering its balance sheet and provides longer term funding that is aligned with the investment portfolio. As a newly formed BDC, there are no substantial near term debt maturities, with its $600 million traditional revolving credit facility set to mature in April 2026. Liquidity is solid with available liquidity comprised of $153 million of available credit facility capacity, subject to borrowing base requirements, and $15.8 million of cash at 2Q21, versus $14 million in unfunded commitments. Management expects to raise new equity at $250 to $300 million per month as it onboards onto new broker-dealer wealth management platforms, and deploy that capital as it is raised, making liquidity more fluid compared to other fully ramped BDCs.

Capitalization is considered strong. ORCIC targets a leverage (debt-to-equity) ratio of 0.90x to 1.25x once fully ramped and was at 0.77x at 2Q21, comfortably inside of regulatory limits of 2.0x. 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. At 2Q21, we estimate ORCIC’s cushion to the regulatory limit at approximately $129 million, implying that ORCIC would need to incur a loss on approximately 30% of its investment portfolio to breach the buffer to the ACR.

Expense support agreements are in place to ensure that any initial shortfall in net investment income is covered by the Advisor in order to cover dividend distributions as the portfolio continues to ramp. While special dividends have been declared for 4Q21, management appears to take a conservative approach to setting dividends while the portfolio continues to grow. ORCIC continues to increase its equity raises on a monthly basis and has sufficient scale to compete in the market. Owl Rock has been a prolific capital raiser with its other investment vehicles, including ORCC and ORCC II, which have similar investment strategies but are structured differently, as both will have public market liquidity. As a perpetually, non-traded BDC, ORCIC shareholders benefit from decreased share price volatility, as its price will be pegged to NAV, but also limited liquidity given the absence of a public listing. Share repurchases through which shareholders may tender their shares will be limited to 5% of the outstanding shares per quarter. As a BDC, the Company is required to distribute 90% of its net investment income as dividends for tax purposes, and this structural 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 2, 2021): https://www.dbrsmorningstar.com/research/383936/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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