KBRA Assigns Ratings to T. Rowe Price OHA Select Private Credit Fund (OCREDIT)

Rhea-AI Summary

KBRA assigns issuer and senior unsecured debt ratings of BBB to T. Rowe Price OHA Select Private Credit Fund. The company is supported by ties to Oak Hill Advisors, L.P.'s $63 billion of Assets Under Management and T. Rowe Price Group, Inc.'s $1.45 trillion in AUM. The company has a solid management team, a diversified investment portfolio, and a strong liquidity position. However, potential risks include illiquid investments, fully secured funding profile, and retained earnings constraints as a Regulated Investment Company.

Positive

• Ties to Oak Hill Advisors, L.P.'s $63 billion of Assets Under Management
• T. Rowe Price Group, Inc.'s $1.45 trillion in AUM
• Solid management team with long track record in private debt markets
• Diversified investment portfolio
• Strong liquidity position

Negative

• Potential risks related to illiquid investments
• Fully secured funding profile
• Retained earnings constraints as a Regulated Investment Company

Insights

Financial Analyst

The assignment of a BBB issuer and senior unsecured debt ratings to T. Rowe Price OHA Select Private Credit Fund (OCREDIT) by KBRA has significant implications for the company's cost of capital and investment appeal. A 'BBB' rating is considered investment grade, which typically allows a firm to borrow at lower interest rates compared to non-investment grade entities. This rating suggests that OCREDIT is viewed as having a moderate credit risk, which is particularly relevant for debt investors seeking stable returns with relatively low risk.

The Stable Outlook indicates that KBRA does not anticipate a change in OCREDIT’s creditworthiness in the short to medium term, providing a degree of certainty to investors. The fund’s association with Oak Hill Advisors, L.P. and its substantial Assets Under Management (AUM) contribute positively to the rating, reflecting a robust financial backing and industry expertise. However, potential investors should be aware of the risks associated with the fund’s investment strategy, which includes a significant portion in first lien senior secured loans. While these instruments offer security, the weighted average leverage and interest coverage ratios should be monitored closely as they can indicate the fund's ability to manage its debt and interest payments, especially during economic downturns.

Market Research Analyst

OCREDIT’s portfolio composition showcases a focus on diversification across various sectors such as High Tech, Healthcare, Consumer Services and Business Services. This strategy can help mitigate sector-specific risks and enhance the stability of returns. The fund's approach of maintaining a majority of investments in first lien senior secured debt reflects a conservative investment philosophy, which could be attractive to risk-averse investors. However, the presence of illiquid investments in the portfolio and the strategy to issue senior unsecured debt in the future could introduce additional risks that need to be balanced against the potential for higher yields.

The fund’s continuous capital raising strategy and monthly distributions may appeal to investors looking for regular income streams, while the ability to redeem up to 5% of shares quarterly offers some liquidity. The lack of non-accruals, as of the reporting date, is a positive indicator of the current health of the investment portfolio. Nonetheless, the market should monitor how the fund's unseasoned portfolio performs over time, as early-stage investments may not fully reflect potential default rates and recovery values.

Legal Expert

OCREDIT’s status as a Business Development Company (BDC) and a Regulated Investment Company (RIC) imposes specific regulatory constraints, such as the requirement to distribute at least 90% of the firm’s investment company taxable income to shareholders. This could limit the company's ability to retain earnings and reinvest in the business, potentially affecting long-term growth. The planned issuance of senior unsecured debt could provide greater financial flexibility, but also requires careful consideration of the regulatory implications and the maintenance of a balanced capital structure to avoid undue risk to the company and its investors.

Investors should also note that the management’s adherence to the stated firm strategy and the maintenance of the current management structure are critical factors in sustaining the rating. Any significant deviation from the strategy or changes in management could trigger a reassessment of the risk profile and potentially lead to a rating downgrade.

NEW YORK--(BUSINESS WIRE)-- KBRA assigns issuer and senior unsecured debt ratings of BBB to T. Rowe Price OHA Select Private Credit Fund (“OCREDIT” or “the company”). The rating Outlook is Stable.

Key Credit Considerations

The ratings 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 ratings are further supported by OCREDIT’s solid management team, which has a long track record working with the private debt markets with each member of senior management having on average 28 or more 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. As a continuously offered, perpetual-life BDC, the company raises capital monthly, pays monthly distributions and allows for redemptions 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. As of September 30, 2023, the company raised gross proceeds of approximately $494 million with no shares repurchased. 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, fully secured funding profile, and retained earnings constraints as a Regulated Investment Company (RIC). While the company’s funding profile is presently fully secured, OCREDIT plans to issue senior unsecured debt as market opportunities permit with a target of 35% unsecured debt to total debt outstanding over the next several years, which would provide the company with greater financial flexibility and provide unencumbered collateral for the benefit of noteholders.

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 timeframe. 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 nonaccruals that significantly affect capital, leverage, and liquidity metrics would also negatively impact ratings/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: 1003092

View source version on businesswire.com: https://www.businesswire.com/news/home/20240129431390/en/

Analytical

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

Constantine Schidlovsky, Senior Director

+1 646-731-1338

constantine.schidlovsky@kbra.com

Source: Kroll Bond Rating Agency, LLC

FAQ

What are the issuer and senior unsecured debt ratings assigned to T. Rowe Price OHA Select Private Credit Fund?

KBRA assigned issuer and senior unsecured debt ratings of BBB to T. Rowe Price OHA Select Private Credit Fund.

What is the total Assets Under Management (AUM) of Oak Hill Advisors, L.P.?

Oak Hill Advisors, L.P. has $63 billion of Assets Under Management.

What is the total Assets Under Management (AUM) of T. Rowe Price Group, Inc.?

T. Rowe Price Group, Inc. has approximately $1.45 trillion in AUM.

What are the potential risks associated with T. Rowe Price OHA Select Private Credit Fund?

Potential risks include illiquid investments, fully secured funding profile, and retained earnings constraints as a Regulated Investment Company.

What is the leverage target range for OCREDIT?

The company expects its leverage to increase to its target range between 1.0x and 1.25x.