KBRA Assigns Rating to Blue Owl Technology Finance Corp. II's $700 Million Senior Unsecured Notes

KBRA assigns a rating of BBB to Blue Owl Technology Finance Corporation II’s (“OTF II” or “the company”) $700 million, 6.750% senior unsecured notes due 2029. The rating Outlook is Stable. The proceeds will be used for general corporate purpose, including the repayment of debt.

Key Credit Considerations

The rating reflects the company’s ties to the sizeable $84.6 billion Blue Owl Capital, Inc. (NYSE: OWL) direct lending platform, the derived benefits from OTF II’s SEC exemptive relief to co-invest with other funds managed by the advisor and its affiliates, and its diversified $3.8 billion investment portfolio with 80.7% of the portfolio composed of senior secured first lien loans to upper middle market companies in technology-related industries. The company's traditional finance portfolio, with weighted average EBITDA and enterprise value of $214 million and $5 billion, respectively, comprised 82.6% of total investment as of December 31, 2023. OTF II’s growth capital portfolio comprised 13.2% of the investment portfolio and had a weighted average enterprise value of $12.8 billion. The top three sector exposures by end market were Systems Software (28.0%), Application Software (15.8%), and Diversified Financial Services (9.5%).

Further supporting the rating is OTF II’s strong management team with a long track record of working within the private debt markets, with each member of the Investment Committee having an average of over 30 years of experience in the industry. The company has a team of approximately 30+ tech-dedicated investment professionals and maintains an office in Menlo Park, CA as well as New York City. Due, in part, to the company’s unseasoned portfolio, the company has no loans on non-accrual status and 99.1% of the company’s investment portfolio maintains an internal risk rating of 1 or 2, its highest classifications out of 5. As of 4Q23, gross leverage was adequate at 1.13x with regulatory asset coverage of 188%, allowing for a solid cushion over its 150% regulatory asset coverage requirement and within its target leverage of 0.90x to 1.25x. The company’s funding profile is diversified, and the additional unsecured debt issuance will boost the company’s senior notes as a percentage of total debt and increase financial flexibility. A significant percentage of the company’s outstanding debt includes its fully drawn $800 million subscription facility that is secured by the company’s capital commitments. As of 4Q23, the company’s liquidity is solid with $2.4 billion of uncalled capital, ~$633 million of available bank lines, and $65 million cash. There are no near-term debt maturities and unfunded commitments totaled $353 million.

The strengths are counterbalanced by the potential risk related to the company’s illiquid investments as a BDC and its unseasoned investment portfolio stemming from its recent formation (October 2021), as well as retained earnings constraints as a Regulated Investment Company (RIC) and the uncertain economic environment and geopolitical risks.

Blue Owl Technology Finance Corp. II is a private, externally managed, non-diversified closed-end management investment company that has elected to be treated as a Business Development Company (BDC) under the 1940 Act and to be treated as an RIC, which, among other things, must distribute to its shareholders at least 90% of the company’s investment company taxable income. The company was formed in October 2021 as a Maryland Corporation and commenced operations in January 2022. The company is managed by Blue Owl Technology Credit Advisors II LLC, an affiliate Blue Owl Capital, Inc., which had approximately $165+ billion of AUM as of December 31, 2023. The company’s investment strategy coincides with the strategy of Blue Owl Technology Finance Corp. (KBRA Issuer/Senior Unsecured Debt ratings of BBB/Stable Outlook) and Blue Owl Technology Income Corp. (KBRA Issuer/Senior Unsecured Debt ratings of BBB/Stable Outlook). Blue Owl’s technology lending products had approximately $20.0 billion of AUM as of December 31, 2023.

Rating Sensitivities

A rating upgrade is not expected in the near-term. The Stable Outlook could be revised to Positive if OTF II’s asset quality remains solid, despite the company’s rapid growth, and leverage metrics remain appropriate for the company’s risk profile. 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 II’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.

To access rating and relevant documents, click here.

Methodologies

• Financial Institutions: Finance Company Global Rating Methodology
• ESG Global Rating Methodology

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: 1003698

View source version on businesswire.com: https://www.businesswire.com/news/home/20240328814168/en/