DBRS Morningstar Revises Owl Rock Core Income Corp.’s Trend to Positive and Confirms Long-Term Ratings of BBB (low)

DBRS, Inc. (DBRS Morningstar) confirmed the Long-Term Issuer Rating and Long-Term Senior Debt Rating of Owl Rock Core Income Corp. (ORCIC or the Company) at BBB (low). The trend on the ratings has been revised to Positive from 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 revision of the trend from Stable to Positive and confirmation of the ratings are supported by ORCIC’s substantial growth over the last year, in line with expectations, combined with the broadening and deepening of its funding and improvement in potential earnings power through its rotation into private credit assets. At 2Q22, ORCIC has grown to an investment portfolio of $8.5 billion and equity of $3.9 billion from an investment portfolio at 2Q21 of $420.7 million and equity of $209.8 million, demonstrating Owl Rock’s capabilities in raising capital and deploying it into investment opportunities. The ratings are implicitly supported by the broader franchise strength of ORCIC’s investment advisor, Owl Rock Capital Advisors LLC (the Advisor), an indirect subsidiary of Blue Owl.

The volatility in the fixed income markets has constrained near-term earnings as unrealized losses were a drag on earnings in 1H22. However, ORCIC has managed to lower its overall exposure to broadly syndicated loans (BSLs), which we estimate based on Level 2 assets, to approximately 14% at 2Q22, which it uses for liquidity purposes to meet potential share repurchase requests. We also expect most performing credit assets to return to par over the average holding period despite the more challenging macroeconomic environment. Of note, ORCIC targets large, upper-middle market sponsored-backed companies which in our view are better positioned to navigate challenging operating environments.

The unsecured mix of ORCIC’s funding has increased to 41% of its capital stack at June 30, 2022, pro forma for its $600 million September unsecured issuance, which is viewed positively for the ratings. Additionally, the Company continues to operate within its stated net leverage target range of 0.90x – 1.25x debt-to-equity, which is supportive of the ratings.

RATING DRIVERS
The ratings would be upgraded with improved earnings and strong credit fundamentals combined with gross leverage remaining below 1.30x. Conversely, sustained earnings weakness 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 regulatory leverage requirements 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. ORCIC’s access to deal flow and ability to raise substantial equity from high net worth retail investors, stems from Owl Rock’s strong franchise which has an established track record of managing multiple direct lending vehicles. As ORCIC has co-investment exemptive relief, the Company is able to lead large private credit deals while minimizing portfolio concentration risk by syndicating exposure throughout its numerous other investment vehicles.

ORCIC’s earnings generation has evolved as its portfolio has rotated into primarily privately originated direct lending assets, which are higher yielding than BSLs. At 2Q22, the weighted average total yield of the portfolio at fair value was 7.9%, up from 6.1% at 2Q21. While net investment income was $111.7 million for 1H22, the Company had a net loss of $80.2 million driven by significant unrealized losses of $192.4 million. While revenue has normalized as the portfolio has fully ramped, we expect net income to have some level of continued volatility from public price marks on its Level 2 assets.

The Company’s focus on upper middle market companies mitigates some credit risk, as we expect larger, more established portfolio companies to be able to navigate the challenging macroeconomic environment and higher borrowing costs better than smaller firms. ORCIC’s direct lending portfolio companies have a weighted average annual revenue of $798.4 million and weighted average EBITDA of $196.2 million at 2Q22. Market risk may be elevated from the Company’s exposure to BSLs, as these assets may be more volatile than private credit investments. As expected, given the newly originated nature of the portfolio, none of the 185 companies in the investment portfolio were on non-accrual at 2Q22. However, we expect some credit deterioration may likely occur over the near-term.

Over the past year, ORCIC has diversified its funding through multiple issuances of unsecured debt and entering into additional asset-based credit facilities. Pro-forma for its September unsecured debt issuance, approximately 41% of its funding is comprised of unsecured debt. The Company has no substantial near term debt maturities, with ORCIC’s $1.55 billion five-year revolving credit facility was amended and extended in August to a scheduled maturity of 2027. Liquidity is influx, as the Company has upsized its revolver by $375 million and its SPV Asset Facility II by $150 million, while putting a new $400 million SPV facility in place. Of ORCIC’s $1.1 billion of unfunded commitments, approximately 75% were delayed draw term loans, which are subject to M&A events or milestones, while the remaining $269 million were revolving loans which could be immediately drawn. Additionally, there has been net-inflows of capital to ORCIC of approximately $1.3 billion for 2Q22, compared to only $27.9 million of repurchased shares, which mitigates much of this liquidity risk.

Capitalization is considered solid with ORCIC operating within its stated target net leverage range of 0.90x to 1.25x debt-to-equity. At June 30, 2022, gross leverage was at the upper end of the range at 1.25x, but 1.19x on a net basis, and comfortably inside of regulatory limits of 2.0x. Importantly, we view the leverage target and current level as having sufficient cushion to the asset coverage ratio (ACR) regulatory limit to absorb valuation volatility driven by its exposure to BSL investments. At 2Q22, we estimate ORCIC’s cushion to the regulatory limit at approximately $1.4 billion, implying that the Company would need to incur a loss of approximately 17% of its 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 DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022) at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-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 2, 2022): https://www.dbrsmorningstar.com/research/402314/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 (May 17, 2022): https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

The primary sources of information used for this rating include Morningstar Inc. and Company Documents. 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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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