KBRA Assigns Rating to Blue Owl Technology Finance Corp.'s Senior Unsecured Notes
KBRA assigns a rating of BBB to Blue Owl Technology Finance Corp. ("OTF" or "the company") $650 million, 6.100% senior unsecured notes due March 15, 2028. The rating Outlook is Stable.
Key Credit Considerations
OTF benefits from its ties to the $128.4 billion Blue Owl Credit platform, with approximately $27 billion deployed into the technology strategy across all funds since inception. The experienced management team that has decades of experience working in the private markets has built a high credit quality direct lending platform to finance mainly sponsor-backed portfolio companies in the upper middle market.
OTF maintains a $6.4 billion diversified investment portfolio with a majority consisting of first lien senior secured loans (69.6%) in technology focused portfolio companies. The company's traditional financing portfolio, which represented 75.1% of total investments, had a weighted average EBITDA of $201 million and enterprise value of $3.98 billion. OTF's growth capital portfolio represents 23.9% of its total portfolio and had a weighted average annual revenue of $724 million and enterprise value of $14.80 billion. As of 3Q24, the top three sector exposures by end market were Systems Software (23.9%), Health Care Technology (16.0%), and Application Software (14.0%).
The company has diversified funding sources including a bank revolving credit facility, SPV asset facilities, CLOs, and unsecured notes. Post 3Q24 quarter-end, the SPV Asset Facility was upsized to $700 million from $600 million and the SPV Asset Facility II was upsized to $400 million from $300 million. Gross and Net leverage was 0.84x and 0.78x, respectively, below the target leverage range of 0.9x to 1.25x, which is appropriate given the company's asset mix with relatively high exposure (approximately 20%) to preferred and common equity, which are more volatile. Asset coverage was 218%, providing a solid cushion. As of 3Q24, the company had adequate liquidity, with ~$763.5 million in available bank lines and $186.5 million in cash set against $605.7 million of unfunded commitments along with $1.2 billion of unsecured notes due within two years. A portion of the unfunded commitments are tied to covenants and transactions and are not expected to be drawn and the issuance will further increase liquidly along with the post 3Q24 quarter end increases in bank credit lines.
Following the Pluralsight LLC restructuring, credit quality is solid with only one portfolio company on non-accrual comprising 0.1% and 0.3% of total investments at FV and cost as of September 30, 2024.
The credit strengths are counterbalanced by the relatively illiquid investments and retained earnings constraints as a RIC. The potential for increased non-accruals with a more uncertain economic environment with high base rates, inflation, and geopolitical risk.
On November 13, 2024, Blue Owl Technology Finance Corp. and Blue Owl Technology Finance Corp. II announced that they entered into a definitive merger agreement, with OTF as the surviving company. The combined company will have approximately $15.8 billion of total assets at FV once all capital is called and the company reaches its target leverage of 0.9x to 1.25x. The expected close of the merger is 2Q25.
Formed in July 2018 as a Maryland Corporation, Blue Owl Technology Finance Corp. ("OTF" or "the company") is a $6.4 billion (total investments at FV) private, non-diversified, externally managed business development company ("BDC") operating under the Investment Company Act of 1940 that has elected to be treated as an RIC for tax purposes. OTF is externally managed by Blue Owl Technology Credit Advisors LLC ("the Adviser"). The Adviser is an indirect subsidiary of Blue Owl Capital (NYSE:OWL), a global alternative asset manager with $235 billion of AUM.
Rating Sensitivities
In the intermediate future, a rating upgrade is not expected. A rating downgrade and/or Outlook change to Negative could be considered if there is a significant downturn in the U.S. economy with negative impact on OTF's earnings performance, asset quality, and leverage. A significant change in senior management and/or risk management policies could also lead to negative rating action.
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Methodologies
Disclosures
A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.
Information on the meaning of each rating category can be located here.
Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.
About KBRA
Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.
Doc ID: 1007536
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Teri Seelig, Managing Director (Lead Analyst)
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Kevin Kent, Director
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