KBRA Assigns Rating to T. Rowe Price OHA Select Private Credit Fund's $300 Million Notes due 2029

Rhea-AI Summary

KBRA assigns a BBB rating to T. Rowe Price OHA Select Private Credit Fund's $300 million senior unsecured notes due 2029. The rating is supported by ties to Oak Hill Advisors, L.P., parent company T. Rowe Price Group, Inc., and a strong management team. OCREDIT maintains a diversified investment portfolio with a focus on senior secured loans.

Positive

• T. Rowe Price OHA Select Private Credit Fund receives a BBB rating for its $300 million senior unsecured notes due 2029.
• The rating is backed by the company's connection to Oak Hill Advisors, L.P., and T. Rowe Price Group, Inc., with a strong reputation in the industry.
• OCREDIT's management team has extensive experience in private debt markets, and the company maintains a diversified investment portfolio with a focus on senior secured loans.

Negative

• Potential risks include illiquid investments, retained earnings constraints as a Regulated Investment Company (RIC), and uncertain economic and geopolitical environments.
• A rating downgrade could occur if the company shifts towards riskier investments with higher leverage or makes significant changes in management structure.
• A prolonged U.S. economic downturn impacting performance and non-accruals could negatively affect the company's rating and outlook.

Insights

Financial Analyst

The assignment of a BBB rating to T. Rowe Price OHA Select Private Credit Fund's senior unsecured notes is indicative of a moderate credit risk profile, which suggests that the company is viewed as having a good credit quality but faces economic conditions that could affect its ability to meet its financial commitments. The Stable Outlook reflects the expectation of the rating agency that the company's financial and operational profile will remain consistent over the medium term. Investors might consider this rating when assessing the creditworthiness of the company and the potential risk associated with the investment.

From a financial perspective, the use of proceeds to repay borrowings under the company's secured revolving bank facility could be seen as a strategic move to optimize the capital structure by replacing short-term, potentially more expensive debt with longer-term financing at a fixed interest rate. This could result in interest expense savings and improved financial flexibility. However, it is essential to monitor the firm's leverage metrics, particularly as the company plans to increase leverage within its target range, which could impact its risk profile and debt servicing capabilities.

Market Research Analyst

The company's association with Oak Hill Advisors, L.P. and the broader T. Rowe Price Group lends it considerable credibility in the market due to their extensive assets under management and established reputations. This affiliation could provide OCREDIT with access to a robust network for deal sourcing and potentially more favorable investment terms, which can be a competitive advantage in the private credit sector. Moreover, the focus on first lien senior secured loans signifies a conservative investment approach, prioritizing investments that are typically lower risk due to their secured nature and seniority in the capital structure.

The diversified investment portfolio and the absence of non-accruals as of September 30, 2023, demonstrate prudent portfolio management and underwriting standards. However, the unseasoned portfolio warrants close observation as it matures, especially in the context of an uncertain economic environment where credit performance can change rapidly.

Legal Expert

OCREDIT's status as a Business Development Company (BDC) and a Regulated Investment Company (RIC) carries specific regulatory implications, particularly the requirement to distribute at least 90% of investment company taxable income to shareholders. This could constrain the company's ability to retain earnings and reinvest in the business, which investors should factor into their expectations for growth and capital appreciation. Additionally, the company's conversion to a Delaware statutory trust and its election to be treated as a BDC under the 1940 Act reflect strategic legal structuring to optimize its operations within the regulatory framework.

The mention of geopolitical risks and an uncertain economic environment in the credit considerations is a reminder of the external factors that can affect the company's performance. Such variables are beyond the company's control and could lead to volatility in the investment portfolio's value and the company's ability to achieve its strategic objectives.

NEW YORK--(BUSINESS WIRE)-- KBRA assigns a rating of BBB to T. Rowe Price OHA Select Private Credit Fund's (“OCREDIT” or “the company”) $300 million 7.77% senior unsecured notes due March 7, 2029. The rating Outlook is Stable. The proceeds will be used to partially repay borrowings under the company's secured revolving bank facility.

Key Credit Considerations

The rating and Outlook are supported by T. Rowe Price OHA Select Private Credit Fund’s ties to Oak Hill Advisors, L.P.’s (“OHA”) $63 billion of Assets Under Management, which includes the $28 billion private credit platform that has obtained SEC exemptive relief to co-invest with OHA affiliates. T. Rowe Price Group, Inc. (NASDAQ: TROW), the parent company of OHA (acquired in 2021), is a global asset manager with approximately $1.45 trillion in AUM. OHA has a strong reputation as a trusted, value-added financing partner which has been cultivated over decades with companies and private equity sponsors (~150). These borrowers value OHA’s deep expertise, independence, and reliability which enhances the firm’s ability to source proprietary deal flow and secure favorable pricing and other terms to benefit investor returns. OHA has more than 400 employees, 120 of which are investment professionals.

The rating is further supported by OCREDIT’s solid management team, which has a long track record working with the private debt markets with senior management having on average 28 years of experience in the industry, as well as a diversified $930 million investment portfolio comprised of primarily first lien senior secured loans (91%). The company intends to maintain between 80% - 95% of its investment portfolio in first lien senior secured debt. As of September 30, 2023, the median portfolio company EBITDA was over $260 million and the weighted average leverage was 6.2x and interest coverage of 1.68x.

At 3Q23, OCREDIT's top four portfolio sectors were High Tech (19% of the total portfolio at fair value), Healthcare / Education / Childcare (14%), Consumer Services (12%), and Business Services (9%). With an unseasoned portfolio, a result of the BDC’s recent formation, there were no non-accruals as of September 30, 2023. OCREDIT's leverage was relatively low at 0.78x, reflective of the company's strong capital raise of $494 million since inception coupled with its conservative investment deployment. As the company ramps up, KBRA expects OCREDIT’s leverage to increase to its target range between 1.0x and 1.25x, in line with many BDCs. The company’s liquidity is adequate with two secured bank facilities totaling $875 million with $491 million of credit availability, no short-term maturities, and $110 million of unfunded loan commitments. With this note offering, the company will add senior unsecured funding to its mix of funding sources to increase financial flexibility. As a continuously offered, perpetual-life BDC, the company raises capital monthly, pays monthly distributions, and allows for redemptions of up to 5% of its shares for repurchase quarterly. Share repurchases are at the direction of the Board of Directors and should markets become disrupted, such that the company's business would be severely affected by repurchases, OCREDIT has no obligation to repurchase any shares. There have not yet been any share repurchases since inception. OCREDIT’s investor base includes capital mostly from a strategic family office and large institutional investors, as well as TROW through one of its funds ($50 million) and an approximate $168 million in additional capital remains uncalled. In addition to its strong institutional investor base, OCREDIT plans to issue shares through registered investment advisors and wirehouses, including the vast TROW network of advisors to qualified investors. To ensure sufficient liquidity for repurchases, the company maintains sufficient cash and available credit lines.

The rating strengths are counterbalanced by the potential risk related to OCREDIT's illiquid investments, retained earnings constraints as a Regulated Investment Company (RIC), and an uncertain economic environment and geopolitical risks.

OCREDIT is an 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 firm’s investment company taxable income. OCREDIT converted to a Delaware statutory trust in March 2022, made its BDC election in June of 2023, and is managed by OHA Private Credit Advisors LLC, an affiliate of Oak Hill Advisors, L.P.

Rating Sensitivities

Given the Stable Outlook, a rating upgrade is not expected over the next one to two-year time frame. A rating downgrade and/or Outlook change to Negative could be considered if management alters its stated firm strategy by increasing focus on riskier investments coupled with higher leverage metrics or makes a significant change in the current management structure. A prolonged downturn in the U.S. economy that has material impact on performance and non-accruals that significantly affect capital, leverage, and liquidity metrics would also negatively impact the rating/Outlook.

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: 1003395

View source version on businesswire.com: https://www.businesswire.com/news/home/20240307550987/en/

Analytical Contacts

Claudia McPherson, Senior Director (Lead Analyst)

+1 646-731-2493

claudia.mcpherson@kbra.com

Teri Seelig, Managing Director

+1 646-731-2386

teri.seelig@kbra.com

Kevin Kent, Director

+1 301-960-7045

kevin.kent@kbra.com

Joe Scott, Senior Managing Director (Rating Committee Chair)

+1 646-731-2438

joe.scott@kbra.com

Business Development Contact

Constantine Schidlovsky, Senior Director

+1 646-731-1338

constantine.schidlovsky@kbra.com

Source: Kroll Bond Rating Agency, LLC

FAQ

What rating did KBRA assign to T. Rowe Price OHA Select Private Credit Fund's senior unsecured notes?

KBRA assigned a BBB rating to the company's $300 million senior unsecured notes due 2029.

What supports the rating and outlook of OCREDIT according to the PR?

The rating and outlook are supported by OCREDIT's ties to Oak Hill Advisors, L.P., and T. Rowe Price Group, Inc., along with a strong management team.

What are some potential risks mentioned in the PR related to OCREDIT?

Potential risks include illiquid investments, retained earnings constraints as a Regulated Investment Company (RIC), and uncertain economic and geopolitical environments.

What could lead to a rating downgrade for OCREDIT according to the PR?

A rating downgrade could occur if the company shifts towards riskier investments with higher leverage or makes significant changes in management structure.

What could negatively impact OCREDIT's rating and outlook related to the U.S. economy?

A prolonged U.S. economic downturn impacting performance and non-accruals could negatively affect the company's rating and outlook.