DBRS Morningstar Upgrades Long-Term Ratings of Blackstone Private Credit Fund to BBB with a Stable Trend

DBRS, Inc. (DBRS Morningstar) upgraded the Long-Term Issuer Rating and Long-Term Senior Debt Rating of Blackstone Private Credit Fund (BCRED or the Company) to BBB from BBB (low). The trend on the ratings has been revised to Stable from Positive. The Company’s Intrinsic Assessment (IA) is BBB, while its Support Assessment is SA3.

KEY RATING CONSIDERATIONS
The ratings upgrade reflects BCRED’s tremendous growth over the past year, which has been in line with expectations, with the Company now being one of the largest business development companies (BDCs). As of 3Q21, BCRED had an investment portfolio of $17.7 billion and equity of $8.5 billion. This was further increased in November to $10.9 billion of equity. This growth is substantial when compared with the Company’s $5.4 billion investment portfolio and $2.1 billion of equity at 1Q21, supported by the strength of Blackstone’s Credit platform which contributes to BCRED’s strong ability to raise capital and source investment opportunities. Blackstone Credit has $188 billion of assets under management (AUM) and an extensive track record across multiple economic cycles. While BCRED does not benefit from an explicit guarantee from Blackstone, the ratings incorporate forms of implicit support from the overall Blackstone Credit platform and BCRED’s positioning as the primary vehicle within the credit business.

The rating action also considers the continuing improvement in earnings as the portfolio rotates into higher-yielding directly originated loans, but it will still take time to deploy the significant capital raised into directly originated private credit. Vintage risk is elevated given the amount of capital that has to be deployed to limit cash drag in a short period of time, but the Company’s increasingly broad equity base limits individual borrower concentration risk. The Company’s funding profile has become substantially diversified through multiple issuances of unsecured notes in both the private and public markets, including multiple currencies,, securitizations, along with its existing corporate revolving credit facility and asset-based credit facilities. Importantly, BCRED has maintained its conservative leverage profile within its target range which is appropriate and supportive of the ratings.

The Stable trend incorporates BCRED’s successful launch and ramp up over the past year while balancing the limited operating history of the vehicle. The Stable trend also reflects our view that the U.S. economic recovery will likely continue, supporting continuing private credit investment opportunities. While the robust M&A market remains constructive for middle market and upper middle market loan originations, further COVID-19 outbreaks and supply chain disruptions amid an increasingly tight labor market and rising inflationary pressure could pose some downside risks to growth going into 2022. However, we expect such an environment to underpin continued solid financial performance from BCRED as well as anchoring solid loan performance in the investment portfolio.

RATING DRIVERS
Demonstrated good operating performance combined with the continued rotation into higher yielding private credit assets while maintaining net asset value would result in an upgrade of the ratings. Conversely, a meaningful increase in non-accrual investments or sizeable loss that materially reduces the Company’s cushion to regulatory leverage requirements would lead to a ratings downgrade.

RATING RATIONALE
DBRS Morningstar views BCRED’s strong franchise as underpinned by its external advisor, Blackstone Credit BDC Advisors LLC (the Advisor), an affiliate of Blackstone. The benefits of Blackstone’s global franchise have been demonstrated by the Company’s ability to raise over $10.9 billion in equity for BCRED since January, with a significant amount from international high net worth investors. The Company is now among the largest BDCs. With co-investment exemptive relief to invest across Blackstone’s other managed vehicles, Blackstone has significant scale to lead large private credit deals in the market without relying on other funds or syndication partners for capital or to mitigate portfolio diversification requirements.

Earnings generation has grown significantly alongside the growth of the investment portfolio, but is still somewhat weighted towards lower-yielding BSL assets as private credit assets have a longer gestation period. We expect to continue seeing a growth in earnings and profitability as the portfolio ramps into higher yielding private credits. Net investment income and net change in net assets (net income) for 3Q21 were solid at $146.5 million and $171.9 million, respectively.

The Company’s focus on upper middle market sponsor-backed first lien loans helps mitigate some of the vintage concentration risk that exists for an investment portfolio constructed in a relatively short period of time. Market risk continues to be elevated from the Company’s exposure to BSLs, which as Level 2 assets have more valuation volatility from credit spreads than private credit investments. None of BCRED’s investments were on non-accrual status as of 3Q21, which is strong considering how many investments have been made this year (404 portfolio companies) but also somewhat expected given the newly originated nature of the portfolio.

In conjunction with raising over $10.9 billion of equity, BCRED has put substantial financing into place to appropriately leverage its capital with $14 billion in committed debt capacity, with 85% in secured floating rate leverage and 15% in unsecured fixed leverage at 3Q21, based on drawn leverage. The Company has built a robust institutional fixed income investor base in both the unsecured and securitization markets, along with significant bank relationships for its corporate revolver and asset-based facilities. The Company has no near-term debt maturities, and we expect maturities to become more evenly staggered as the equity ramp slows and corresponding debt issuances become less frequent.

Capitalization remains conservative, with a targeted leverage ratio of 1.00x to 1.35x debt-to-equity over the long-term and well inside of regulatory limits of 2.0x. BCRED reported a leverage ratio of 1.04x at 3Q21. Importantly, we see the leverage target and current leverage levels as having sufficient cushion to the asset coverage ratio (ACR) regulatory limit to absorb potential valuation volatility driven by the outsized exposure to BSL investments in the portfolio. We estimate BCRED’s cushion to the regulatory leverage limit at $4.1 billion as of 3Q21, implying that BCRED would need to incur a loss on 23% of its investment portfolio to breach the buffer to the ACR.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (September 2, 2021): https://www.dbrsmorningstar.com/research/383936/global-methodology-for-rating-non-bank-financial-institutions. Other applicable methodologies include DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

The primary sources of information used for this rating include Company Documents and S&P Capital IQ. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings:

Each of the principal methodologies/principal asset class methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision, Specifically, the Global Methodology for Rating Non-Bank Financial Institutions (September 2, 2021) was used to evaluate the Issuer, and DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021) was used to was used to assess ESG factors.

This is the first rating action since the Initial Rating Date.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

Lead Analyst: Watson Tanlamai, Vice President – Global Financial Institutions
Rating Committee Chair: David Laterza, Senior Vice President, Head of Non-Bank Financial Institutions
Initial Rating Date: May 24, 2021

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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