DBRS Morningstar Confirms Ratings on the Class A-1 Notes Issued by Garrison Funding 2018-2 Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed its ratings of AAA (sf) on the Class A-1R-R Senior-Secured Revolving Floating-Rate Notes (the Class A-1R-R Notes) and on the Class A-1T-R Senior-Secured Floating-Rate Notes (the Class A-1T-R Notes; together with the Class A-1R-R Notes, the Class A-1 Notes) issued by Garrison Funding 2018-2 Ltd. (the Issuer or Garrison CLO) pursuant to the Indenture dated as of October 18, 2018, among the Issuer; Garrison Funding 2018-2 LLC as Co-Issuer; and Deutsche Bank Trust Company Americas as Trustee.

The rating on the Class A-1R-R Notes addresses the timely payment of interest up to the Interest Rate Cap (as defined in the Indenture) and the ultimate payment of principal on or before the Stated Maturity (as defined in the Indenture). The rating on the Class A-1R-R Notes does not address the payment of any Class A-1R Note Additional Amount (as defined in the Indenture). The rating on the Class A-1T-R Notes addresses the timely payment of interest and the ultimate payment of principal on or before the Stated Maturity (as defined in the Indenture).

The Secured Notes (as defined in the Indenture) issued by Garrison CLO are collateralized primarily by a portfolio of U.S. senior-secured middle-market corporate loans and will be managed by Garrison Capital Inc. (GCI) as Collateral Manager and Garrison Capital Advisers LLC (GCA) as Sub-Collateral Manager. Both the Collateral Manager and the Sub-Collateral Manager are affiliates of Garrison Investment Group LP (Garrison).

On June 24, 2020, GCI announced its planned merger with and into Portman Ridge Finance Corporation (PRFC), a business development company managed by Sierra Crest Investment Management LLC, an affiliate of BC Partners Advisors L.P. (BC Partners) and LibreMax Capital LLC. With the merger, the Collateral Manager will be PRFC and the Sub Collateral Manager will be Sierra Crest Investment Management (SCIM). DBRS Morningstar has contemplated this planned merger in the rating analysis.

The ratings reflect the following:

(1) The Indenture dated as of October 18, 2018;
(2) The integrity of the transaction structure;
(3) DBRS Morningstar’s assessment of the portfolio quality;
(4) Adequate credit enhancement to withstand projected collateral loss rates under various cash flow stress scenarios; and
(5) DBRS Morningstar’s assessment of the origination, servicing, and collateralized loan obligation management capabilities of GCI, GCA, Garrison, PRFC, SCIM, and BC Partners.

To assess portfolio credit quality, DBRS Morningstar provides a credit estimate or internal assessment for each nonfinancial corporate obligor in the portfolio not rated by DBRS Morningstar. Credit estimates are not ratings; rather, they represent a model-driven default probability for each obligor that is used in assigning a rating to the facility.

The Events of Default (EOD) contain an EOD Overcollateralization Ratio trigger; however, the Assets securing the Secured Notes may not be sold unless the Trustee determines that the liquidation proceeds would be sufficient to repay all interest and principal on the Secured Notes, or Holders of at least a majority of each Class of Secured Notes (voting separately by Class) consent to and direct the sale and liquidation of the Assets (all capitalized terms as defined in the Indenture).

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.

As the Coronavirus Disease (COVID-19) spread around the world, certain countries imposed quarantines and lockdowns, including the United States, which alone accounts for more than one-fourth of confirmed cases worldwide. The coronavirus pandemic has negatively affected not only the economies of the countries with the highest infection rates but also the overall global economy, with diminished demand for goods and services as well as disrupted supply chains. The effects of the pandemic may result in deteriorated financial conditions for many companies and obligors, some of which will experience the effects of such negative economic trends more intensely than others. At the same time, governments and central banks in multiple regions, including the United States and Europe, have taken significant measures to mitigate the economic fallout from the coronavirus pandemic.

In conjunction with DBRS Morningstar’s commentary “Global Macroeconomic Scenarios: Implications for Credit Ratings” published on April 16, 2020, and updated in its “Global Macroeconomic Scenarios: June Update” commentary on June 1, 2020, and “Global Macroeconomic Scenarios: September Update” on September 10, 2020, DBRS Morningstar further considers additional adjustments to assumptions for the collateralized loan obligation (CLO) asset class that consider the moderate economic scenario outlined in the commentaries. The adjustments include a higher default assumption for the weighted-average (WA) credit quality of the current collateral obligation portfolio. To derive the higher default assumption, DBRS Morningstar notches ratings for obligors in certain industries and obligors at various rating levels based on their perceived exposure to the adverse disruptions caused by the coronavirus pandemic. Considering a higher default assumption would result in losses that exceed the original default expectations for the affected classes of notes. DBRS Morningstar may adjust the default expectations further if the duration or severity of the adverse disruptions caused by the coronavirus change.

For CLOs, DBRS Morningstar ran an additional higher default adjustment on the weighted-average DBRS Morningstar Risk Score of the current collateral obligation pool, and this adjusted modelling pool was run through the DBRS Morningstar CLO Asset Model to generate a stressed default rate. DBRS Morningstar then performed a cash flow model analysis to determine the breakeven default rate for the rated debt. The breakeven default rate is computed over nine combinations of default timing and interest rate stresses. The breakeven default rate must exceed the lifetime total default rate generated by the DBRS Morningstar CLO Asset Model for the debt in order to achieve the rating. The results of this adjustment indicate that the Class A Notes can withstand an additional higher default stress commensurate with a moderate-scenario impact of the coronavirus pandemic.

For more information regarding DBRS Morningstar’s simplified set of macroeconomic scenarios for select economies related to the coronavirus, please see its April 16, 2020, commentary “Global Macroeconomic Scenarios: Implications for Credit Ratings” at https://www.dbrsmorningstar.com/research/359679; its April 22, 2020, commentary “Global Macroeconomic Scenarios: Application to Credit Ratings” at https://www.dbrsmorningstar.com/research/359903; its July 22, 2020, updated commentary, “Global Macroeconomic Scenarios: July Update” at
https://www.dbrsmorningstar.com/research/364318, and its September 10, 2020, updated commentary “DBRS Morningstar: Global Macroeconomic Scenarios: September Update” at
https://www.dbrsmorningstar.com/research/366543.

For more information regarding DBRS Morningstar’s additional adjustment for select industries related to the coronavirus, please see its May 18, 2020, commentary, “CLO Risk Exposure to the Coronavirus Disease (COVID-19)” at https://www.dbrsmorningstar.com/research/361112/clo-risk-exposure-to-the-coronavirus-disease-covid-19.

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

The principal methodology is Rating CLOs and CDOs of Large Corporate Credit (July 21, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308

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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

This rating is endorsed by DBRS Ratings Limited (DBRS Morningstar) for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

The last rating action on this transaction took place on October 16, 2019.

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.

Lead Analyst: Quan Yoon, CFA, Assistant Vice President
Rating Committee Chair: Jerry van Koolbergen, Managing Director, Head of U.S. Structured Credit
Initial Rating Date: September 21, 2018.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

DBRS, Inc.
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New York, NY 10005 USA
Tel. +1 212 806-3277

-- Rating CLOs and CDOs of Large Corporate Credit and CLO Asset Model Version 2.2.3 (July 21, 2020) https://www.dbrsmorningstar.com/research/364310/rating-clos-and-cdos-of-large-corporate-credit

-- Operational Risk Assessment for Collateralized Loan Obligation (CLO) and Collateralized Debt Obligation (CDO) Managers of Large Corporate Credits (September 22, 2020)
https://www.dbrsmorningstar.com/research/366977/operational-risk-assessment-for-collateralized-loan-obligation-clo-and-collateralized-debt-obligation-cdo-managers-of-large-corporate-credits

-- Cash Flow Assumptions for Corporate Credit Securitizations (July 21, 2020)
https://www.dbrsmorningstar.com/research/364311/cash-flow-assumptions-for-corporate-credit-securitizations

-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 4, 2020)
https://www.dbrsmorningstar.com/research/361961/interest-rate-stresses-for-us-structured-finance-transactions

-- Legal Criteria for U.S. Structured Finance (January 21, 2020)
https://www.dbrsmorningstar.com/research/355719/legal-criteria-for-us-structured-finance