Fitch Ratings has upgraded the Long-Term Issuer Default Ratings (IDRs) of
The Rating Outlook is Stable. Fitch has also upgraded
Key Rating Drivers
The ratings upgrade reflects enhanced product diversity for Blue Owl in recent years, partially driven by the acquisitions of
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
In addition, there is potential for up to a
On
The KAM and Prima acquisitions, collectively, will increase Blue Owl's AUM by around
Blue Owl's fee-related EBITDA (FEBITDA) margin was 55.4% for the year ended
Leverage (debt/FEBITDA) was 2.3x for the year ended
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
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
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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