Fitch Ratings has upgraded the Long-Term Issuer Default Ratings (IDRs) of Blue Owl Capital Inc. (Blue Owl) and Blue Owl Finance LLC, which is an indirect finance subsidiary of Blue Owl, to 'BBB+' from 'BBB'.

The Rating Outlook is Stable. Fitch has also upgraded Blue Owl Finance LLC's senior unsecured debt rating to 'BBB+' from 'BBB'.

Key Rating Drivers

The ratings upgrade reflects enhanced product diversity for Blue Owl in recent years, partially driven by the acquisitions of Oak Street Real Estate Capital, LLC in 2021 and Wellfleet Credit Partners, LLC in 2022. The ratings also reflect solid execution against financial projections since the merger of Owl Rock Capital Group and Dyal Capital Partners in May 2021, resulting in strong fee-earning assets under management (FAUM) growth and an above-average fee-related EBITDA (FEBITDA) margin. Fitch expects further diversification in Blue Owl's assets under management (AUM) to result from its planned acquisitions of Kuvare Asset Management (KAM) and Prima Capital Advisors (Prima).

Blue Owl's ratings continue to reflect the firm's solid market positions in each of its platforms, the permanence of the majority of its FAUM, solid investment performance and flows, strong FEBITDA margins, appropriate leverage and interest coverage, and an experienced management team.

Rating constraints include less, albeit improving, scale and product diversity than higher-rated peers, a below-average capacity to earn incentive fees, high payout ratio and higher-than-peer leverage following recent opportunistic debt issuances.

Rating constraints for alternative investment managers (IMs) more broadly include key person risk, which is institutionalized throughout many limited partnership agreements; reputational risk, which can impact a manager's ability to raise future funds; and legal, political and regulatory risks. Fitch also notes the more challenging macroeconomic conditions, including rising interest rates, inflationary pressures, elevated recession risk, geopolitical risk and an increased risk of a government shutdown, all of which may pressure investment performance and fundraising.

Elevated interest rates can potentially reduce investor appetite for alternative investments as absolute returns on lower risk/lower fee products increase. The continuation of elevated interest rates and the challenging economic backdrop will also challenge portfolio companies, thereby pressuring managers' performance.

On April 3, 2024, Blue Owl announced it had entered into a definitive purchase agreement to acquire KAM, a boutique investment management firm focused on providing asset management services to the insurance industry, for $750 million. The acquisition is expected to close in 2Q24 or 3Q24. Blue Owl will fund the KAM acquisition through a combination of $325 million in cash and $425 million in stock.

In addition, there is potential for up to a $250 million earnout subject to certain adjustments and achievements of future revenue targets. Separately, Blue Owl made a long-term investment in Kuvare UK Holdings (Kuvare) on April 3, 2024, purchasing $250 million of preferred equity.

On April 9, 2024, Blue Owl announced it had entered into a definitive purchase agreement to acquire Prima for $170 million, which will be funded through a combination of approximately $13 million in cash and $157 million in stock. In addition, there is potential for up to a $35 million earnout subject to performance thresholds. Prima is a real estate finance manager investing primarily in commercial mortgage whole loans, CMBS Securities, REIT bonds and mezzanine notes. The acquisition is expected to close in 2Q24 or 3Q24.

The KAM and Prima acquisitions, collectively, will increase Blue Owl's AUM by around $30 billion and add new investment strategies to Blue Owl's credit and real estate platforms, including investment grade private credit, private and public ABS, commercial real estate lending/CMBS, liquid real estate credit and real estate private lending. While leverage will increase in the near term if Blue Owl issues debt to fund a portion of the acquisition consideration, the new businesses will contribute to additional FEBITDA growth for Blue Owl beginning this year. Fitch views the expected product diversification and FEBITDA growth favorably.

Blue Owl's fee-related EBITDA (FEBITDA) margin was 55.4% for the year ended Dec. 31, 2023, which is within Fitch's 'aa' category benchmark range of over 50% for alternative IMs. If Part I fees from managed business development companies were included in FEBITDA, the margin would have been 58.6%. Fitch believes Blue Owl's FEBITDA margins will remain near current levels. Blue Owl expects the acquisitions of KAM and Prima to be collectively accretive to the firm's fee-related earnings and distributable earnings in 2024.

Leverage (debt/FEBITDA) was 2.3x for the year ended Dec. 31, 2023, near the upper-end of Fitch's 'a' category benchmark range of 0.5x-2.5x for alternative IMs. Assuming the firm funds the full $325 million cash consideration for the KAM acquisition and the $250 million preferred investment in Kuvare with additional debt, Fitch estimates that leverage would immediately increase to 3.1x, pro forma for the debt issuance and based on 2023 FEBITDA, which would be within Fitch's 'bbb' category benchmark range of 2.5x-4.0x.

Fitch believes future FEBITDA growth will offset the impact of the incremental debt over time and expects leverage to decline below 3.0x by year-end 2024. Still, Blue Owl could continue to consider additional debt-funded acquisitions to expand and/or scale its product set, which could yield some variability in leverage over time.

Debt service coverage (FEBITDA/interest expense), was 9.8x for the year ended Dec. 31, 2023, within Fitch's 'a' category quantitative benchmark range of 8x-12x for alternative IMs. Fitch believes interest coverage will decline in the near-term given the expected debt issuance to fund the KAM acquisition, but remain near the low end of the 'a' category benchmark range.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Negative rating momentum could result from a sustained increase in gross leverage above 3.0x, a sustained decline in the FEBITDA margin below 50%, material changes in operating strategy or leverage tolerance resulting from changes in risk appetite, declines in investment performance that adversely affect the business franchise, meaningful FAUM contraction that impairs FEBITDA and/or reduced product line diversity.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Fitch views positive rating momentum as unlikely in the near term. Longer term, positive rating momentum could be driven by continued growth in new products that meaningfully enhances Blue Owl's product diversity and/or a meaningful improvement in Blue Owl's incentive income earning potential. Maintenance of the FEBITDA margin near or above the current level, gross leverage below 2.5x, strong interest coverage and solid liquidity would also be necessary for additional positive rating momentum.

Absent a meaningful change in Blue Owl's product diversity or incentive income earning potential, positive rating momentum could be driven by a sustained reduction in leverage below 1.5x, while maintaining FEBITDA margins near or above the current levels, strong interest coverage and solid liquidity.

DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS

The unsecured debt rating is equalized with the Long-Term IDR, which reflects the fully unsecured funding profile and expectations for average recovery prospects in a stress scenario.

DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES

The unsecured debt rating is primarily sensitive to changes in the Long-Term IDR; therefore, these ratings are expected to move in tandem. However, a material reduction in recovery prospects resulting from a significant increase in secured debt or a meaningful decline in the business's cash flows could result in the unsecured debt rating being notched down from the IDR.

SUBSIDIARY AND AFFILIATE RATINGS: RATING SENSITIVITIES

Blue Owl Finance LLC is an indirect finance subsidiary of Blue Owl and its Long-Term IDR is equalized with Blue Owl's Long-Term IDR. Blue Owl Finance LLC's Long-Term IDR is linked to Blue Owl's Long-Term IDR and is expected to move in tandem.

ADJUSTMENTS

The Standalone Credit Profile has been assigned in line with the implied Standalone Credit Profile.

The Asset Performance score has been assigned below the implied score due to the following adjustment reason(s): Historical and future metrics (negative).

The Earnings & Profitability score has been assigned below the implied score due to the following adjustment reason(s): Revenue diversification (negative).

The Capitalization & Leverage score has been assigned below the implied score due to the following adjustment reason(s): Historical and future metrics (negative).

The Funding, Liquidity & Coverage score has been assigned below the implied score due to the following adjustment reason(s): Liquidity coverage (negative).

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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