KBRA is publishing issuer and senior unsecured debt ratings of BBB for Owl Rock Technology Finance Corporation II (“ORTF II”) or (“the company”). On September 13, 2022, these ratings were initially assigned on an unpublished basis. The rating Outlook is Stable.
Key Credit Considerations
The ratings reflect the company’s ties to the sizeable $68.6 billion Blue Owl direct lending platform, the derived benefits from ORTF II’s SEC exemptive relief to co-invest with other funds managed by the advisor and its affiliates, and its diversified $2.5 billion investment portfolio with a focus on providing financing to technology focused upper middle market companies. The company’s investments classified as traditional financing comprised 76.8% of the debt portfolio while its investments classified as growth capital comprised 18.1% as of December 31, 2022. Investments classified as traditional financing had a weighted average EBITDA and enterprise value of $200 million and $5.3 billion, respectively. Investments classified as growth capital had a weighted average enterprise value of $12.0 billion. First lien senior secured debt comprised 73.5% of total investments. The company’s top 3 industry concentrations were Systems Software (31.3%), Application Software (19.0%), and Health Care Technology (8.3%). The ratings also reflect the company’s adequate gross leverage of 1.02x with regulatory asset coverage of 195.8%, generating an adequate 30.5% asset coverage cushion which KBRA believes should help ORTF II absorb increased market volatility with higher interest rates and inflation in less favorable markets. ORTF II had $3.5 billion of committed capital, of which approximately $1.2 billion has been called as of March 3, 2023. Around $51 million of the committed capital is from affiliated companies. The ratings also reflect the company’s solid management team, which has a long track record of working within the private debt markets with each member of the Investment Committee having an average of over 25 years of experience in the industry. Additionally, the company has a team of approximately 25+ tech-dedicated investment professionals and maintains an office in Menlo Park, CA to support origination and risk management. The company had no non-accruals as of December 31, 2022, partially due to the generally short period of operations, less than two years ago. The company’s funding profile is diversified with $2.3 billion of committed debt facilities. However, the outstanding debt includes its mostly drawn $800 million subscription facility that is secured by the Company’s capital commitments. This represented approximately 62% of total debt outstanding. Secured debt (excluding the subscription credit facility) to total assets was only 19% as of December 31, 2022. To further diversify its funding sources and increase financial flexibility, ORTF II plans to issue unsecured senior debt in the medium term. 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, as well as retained earnings constraints as a Regulated Investment Company (RIC).
Owl Rock 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 a 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 December 2021. The company is managed by Owl Rock Technology Advisors II LLC (“Adviser”) an indirect subsidiary of Blue Owl Capital, Inc. (NYSE: OWL), which had approximately $138 billion of AUM as of December 31, 2022. The company’s investment strategy coincides with the strategy of Owl Rock Technology Finance Corp. (KBRA Issuer/ Senior Unsecured Debt ratings of BBB/ Stable Outlook). Blue Owl’s technology lending products had approximately $16.0 billon of AUM as of December 31, 2022.
In the near future, a rating upgrade is not expected. The Stable Outlook could be revised to Positive if ORTF 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 ORTF 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.
The ratings are based on KBRA’s Finance Company Global Rating Methodology published on November 28, 2017 and KBRA’s ESG Global Rating Methodology published on June 16, 2021.
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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.
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