DBRS Comments on TCP DLF VIII 2018 CLO, LLC’s Misapplication of Interest Proceeds and Execution of the First Amendment

On February 28, 2018, DBRS, Inc. (DBRS) assigned provisional ratings of AAA (sf) and BBB (low) (sf) to the Class A-1 Notes and Combination Notes, respectively, and new ratings of AA (sf), A (sf), BBB (sf), BB (sf) and (B (sf) to the Class A-2 Notes, Class B Notes, Class C Notes, Class D Notes and Class E Notes, respectively (collectively, the Notes), issued by TCP DLF VIII 2018 CLO, LLC (the Issuer) pursuant to the Note Purchase and Security Agreement dated as of February 28, 2018, among TCP DLF VIII 2018 CLO, LLC as Issuer; U.S. Bank National Association (rated AA (high) with a Stable trend by DBRS) as Collateral Agent, Custodian, Collateral Administrator, Information Agent and Note Agent; and the Purchasers referred to therein.

On the first Quarterly Payment Date in September 2018, Series I of SVOF/MM LLC (the Collateral Manager) on behalf of the Issuer, misapplied funds on deposit in the Interest Reserve Account. Funds on deposit in the Interest Reserve Account were only permitted to be used in the Priority of Payments if there was an interest shortfall up to and including the Class E Notes. However, a total of approximately $500,000 or 50% of the original $1 million balance, was incorrectly transferred from the Interest Reserve Account to the Collection Account and distributed as Interest Proceeds through the Priority of Payments.

In an effort to partially correct the error, on the second Quarterly Payment Date in December 2018, the Collateral Manager allocated about $155,000 of interest proceeds from all available excess interest (after payment of interest up to and including the Class E Notes), which, in addition to the prior remaining balance, resulted in an Interest Reserve Account balance that is currently $656,239.25.

On January 28, 2019, the Collateral Manager and the Issuer entered into the First Amendment (the Amendment) among the Issuer and the Collateral Manager and acknowledged by the Note Agent, which, among other things, will make certain changes to the Note Purchase and Security Agreement to refill the Interest Reserve Account back up to its original balance of $1,000,000 and clarify the language regarding distribution of funds on deposit in the Interest Reserve Account thereafter. According to the Collateral Manager, on behalf of the Issuer, the Interest Reserve Account is anticipated to be fully funded on the March 2019 Quarterly Payment Date and distributed on the June 2019 Quarterly Payment Date.

DBRS considers the misapplication of the funds on deposit in the Interest Reserve Account, ceteris paribus, not to be impactful to the outstanding ratings on the Notes of the Issuer. The magnitude of the misapplication, ceteris paribus, in the opinion of DBRS did not and will not cause a material change in the results of the cash flow analysis for the outstanding ratings of the Issuer. Further, the actions by the Collateral Manager to partially replenish the misapplied funds on the second Quarterly Payment Date, and the subsequent Amendment proposed by the Collateral Manager to replenish the Interest Reserve Account will provide the original intended protection to Noteholders.

As a result, DBRS has determined that the execution of the Amendment will not in and of itself result in a downgrade or discontinuation of the current outstanding ratings on the Notes rated by DBRS.

Satisfaction of the Rating Condition with respect to the Notes in the context of the Amendment does not signify the approval of the Amendment by DBRS nor is it an opinion by DBRS as to whether the Amendment is beneficial or detrimental to the holders of the Notes.

Continuation of the ratings on the Notes is subject to the provision to DBRS of timely and sufficient information for the purposes of monitoring the continued performance of the Notes.

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

The principal methodology is Rating CLOs and CDOs of Large Corporate Credit, which can be found on dbrs.com under Methodologies & Criteria.

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

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