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,
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
ORCIC commenced operations in
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
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
ORCIC's funding diversity is narrow and primarily utilizing secured funding facilities and a promissory note from Owl Rock. The Company recently issued
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
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
The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (
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
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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Ratings
Date Issued Debt Rated Action Rating Trend Attributesi
US = Lead Analyst based in USA
CA = Lead Analyst based in
EU = Lead Analyst based in EU
E = EU endorsed
U =
Unsolicited Participating With Access
Unsolicited Participating Without Access
Unsolicited Non-participating
27-Sep-21 Long-Term Issuer Rating New Rating BBB (low) Stb US
27-Sep-21 Long-Term Senior Debt New Rating BBB (low) Stb US
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