DBRS Morningstar Revises Blackstone Private Credit Fund’s Trend to Positive and Confirms Long-Term Ratings of BBB

DBRS, Inc. (DBRS Morningstar) confirmed the Long-Term Issuer Rating and Long-Term Senior Debt Rating of Blackstone Private Credit Fund (BCRED or the Company) at BBB. The trend on the ratings has been revised to Positive from Stable. 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 RATING CONSIDERATIONS
The revision of the trend to Positive from Stable and ratings confirmation are underpinned by BCRED’s continued growth as the Company has become the largest business development company (BDC) as well as the largest perpetual pool of capital focused on private credit lending. The scale advantages of a $46.2 billion investment portfolio and $21.0 million of equity at 2Q22, particularly during a time of a slowing and potentially recessionary economy, have made BCRED a key funding source for financial sponsors as the syndicated loan market remains largely shut. BCRED is one of the few private credit lenders that can underwrite $1+ billion transactions without the need for partners. As the lender of choice for many of these upper middle market transactions, BCRED’s underlying portfolio companies are large (weighted average EBITDA of $167 million at 2Q22) and have a substantial reason to exist with durable revenue streams and relatively low loan-to-values (43% at 2Q22). We believe these upper-middle market sponsor-backed companies should be better positioned to navigate the challenging macroeconomic environment than smaller companies.
Additionally, the trend revision reflects the diverse and broad funding mix BCRED has achieved by tapping new fixed income markets to BDCs and building a large institutional fixed income investor base to complement its high-net-worth equity investors. The Company’s revenue has further strengthened as the portfolio is fully rotated into its target allocation of higher-yielding private credit assets, which are almost entirely floating-rate and are positioned to benefit from increased interest rates.
Continued volatility in the fixed income markets has constrained profitability as the Company had $950.7 million of unrealized losses in 1H22. Nevertheless, BCRED’s growing and performing investment portfolio continues to generate a good level of net investment income that is primarily comprised of interest income. For 1H22, BCRED reported net investment income of $770 million, up over 550% from the prior year period. BCRED has maintained a relatively high level of portfolio liquidity through broadly syndicated loans (BSLs), estimated based on Level 2 assets, at 23% of the investment portfolio at 2Q22. While we expect most performing credit assets to return to par over the average holding period, liquid securities have more price volatility than private credit assets which comprise the bulk of the investment portfolio. Despite those challenges, we believe the diversified portfolio, defensive positioning and enhanced market position of BCRED warrant a revision of the trend to Positive.

RATING DRIVERS
The ratings would be upgraded with strong net investment income performance along with no material realized losses from the investment portfolio while maintaining gross leverage below 1.30x. Conversely, sustained weakness in net investment income generation or significant realized losses on the investment portfolio 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
BCRED’s franchise strength is derived from its investment advisor, Blackstone Credit BDC Advisors LLC (the Advisor), an affiliate of Blackstone. The global credit platform franchise provides substantial deal flow access to BCRED while the Company benefits from fundraising efforts and brand recognition throughout high net worth investors. These benefits are evident as the Company has raised over $22.6 billion in equity subscriptions since commencing operations in January 2021. The scale of the $46.2 billion investment portfolio allows BCRED to invest meaningful amounts of capital (+$1 billion) without relying on syndication partners, while still maintaining portfolio diversification requirements. BCRED is able to effectively compete with the syndicated loan markets for sizeable transactions with execution and pricing certainty, making it an attractive alternative source of financing to financial sponsors.
The Company’s earnings power has strengthened as the investment portfolio continues to rotate into private credit assets, with a fair value portfolio weighted average yield of 7.5% at 2Q22, up from 6.2% at 2Q21. For 1H22, net investment income was $770.0 million, versus $117.8 million in 1H21, demonstrating the rapid growth of the investment capital. However, as credit spreads widened, particularly affecting BSLs, the Company had a net loss of $192.0 million in 1H22 compared with net income of $192.3 million in 1H21. While the fully ramped investment portfolio has normalized revenue, we expect net income to have some level of continued volatility from potential unrealized losses and gains from reversals of previous marks.
We expect larger, more established portfolio companies to be better able to face challenging macroeconomic pressures combined with higher borrowing costs as interest rates rise than lower middle market companies. BCRED’s investment focus on upper middle market companies mitigates some credit risk, as its portfolio companies have a weighted average EBITDA of $167 million at 2Q22. Market risk from price volatility may be elevated from the exposure to BSLs as these marks move more quickly than private credit investments. None of BCRED’s 587 portfolio companies were on non-accrual at 2Q22, though we expect as the portfolio seasons and economic activity slows that some credit deterioration will occur.
In combination with raising substantial equity, BCRED has maintained its target leverage by accessing both secured and unsecured forms of financing. At 2Q22 with $22.6 billion of debt outstanding, financing came from the corporate revolver (5%), asset-based SPV facilities (53%), unsecured bonds (29%), secured short-term debt (1%), and CLOs (12%). The Company has been one of the only BDCs to access debt markets outside of the U.S,, in both Euro and GBP, and has no significant near-term debt maturities in 2023 to refinance. Liquidity is solid with $6.9 billion of available credit facility capacity and $1.6 billion of cash at 2Q22, compared with $6.9 billion in unfunded commitments. BCRED has had $9.1 billion of equity subscriptions over 1H22 compared to only $340.3 million of repurchased shares, which also bolsters liquidity.
BCRED operates with solid capitalization, targeting a leverage ratio of 1.00x to 1.25x debt-to-equity. At 2Q22, gross debt-to-equity was 1.22x, well inside of the regulatory limit of 2.0x. We view the leverage target and current level as having sufficient cushion to the asset coverage ratio (ACR) regulatory limit to absorb potential valuation volatility driven by the Company’s exposure to BSLs. At 2Q22, we estimate BCRED’s cushion to the regulatory limit at approximately $8.5 billion, implying that the Company would need to incur a loss of approximately 18% 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 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.

DBRS Morningstar notes that this Press Release was amended on November 15, 2022 to incorporate the name of the Lead Analyst and Rating Committee Chair, initial rating date and the link to the company website.
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.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings:
Each of the principal methodologies/principal asset class methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, the Global Methodology for Rating Non-Bank Financial Institutions (September 2, 2022) was used to evaluate the Issuer, and DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022) was used to was used to assess ESG factors.

The last rating action on this issuer took place on November 22, 2021, when the rating was upgraded to BBB from BBB (low) and the trend was revised to Stable from Positive.

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 further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
Lead Analyst: Watson Tanlamai, Vice President – Global Financial Institutions
Rating Committee Chair: Michael Driscoll, Managing Director, Head of North American FIG
Initial Rating Date: May 24, 2021

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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