DBRS Morningstar Confirms Ratings on Brightwood Capital Offshore Fund IV SPV-3, LLC

DBRS, Inc. (DBRS Morningstar) confirmed its ratings of AA (sf) on each of the Class A-R-1 Loans (formerly Class A-R Loans), up to the total commitment permitted of $60,000,000; the Class A-T Loans, up to the total commitment permitted of $60,000,000; and the Class A-R-2 Loans up to the total commitment permitted of $20,000,000 (the Class A-R-2 Loans; together with the Class A-R-1 Loans and the Class A-T Loans, the Class A Loans or the Loans) issued by Brightwood Capital Offshore Fund IV SPV-3, LLC (the Borrower).

The Class A Loans were issued pursuant to the Credit Agreement dated as of February 15, 2019 (as amended by Amendment No. 1 to the Credit Agreement, dated as of July 26, 2019; as further amended by Amendment No. 2 to the Credit Agreement, dated as of September 11, 2019; and as further amended by Amendment No. 3 to the Credit Agreement, dated as of December 27, 2019). The Loans were issued among the Borrower; the Lenders referred to therein; Barclays Bank PLC, New York Branch as Facility Agent; and U.S. Bank National Association (rated AA (high) with a Negative trend by DBRS Morningstar) as Collateral Agent and Custodian.

The ratings on the Loans address the timely payment of interest and the ultimate payment of principal on or before the Stated Maturity (as defined in the Credit Agreement).

The Class A Loans issued by the Borrower will be collateralized primarily by a portfolio of U.S. middle-market corporate loans. The Borrower will be managed by Brightwood SPV Advisors, LLC (Brightwood SPV), which is 100% equity owned by Brightwood Capital Advisors, LLC (Brightwood Capital). DBRS Morningstar considers Brightwood SPV to be an acceptable collateralized loan obligation (CLO) manager.

The ratings reflect the following:

(1) The Credit Agreement dated February 15, 2019 (as amended by Amendment No. 1 to the Credit Agreement, dated July 26, 2019; Amendment No. 2 to the Credit Agreement dated September 11, 2019; and Amendment No. 3 to the Credit Agreement, dated December 27, 2019).

(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.

(5) DBRS Morningstar’s assessment of the origination, servicing, and CLO management capabilities of Brightwood SPV and Brightwood Capital.

To assess portfolio credit quality, DBRS Morningstar provides a credit estimate or internal assessment for each nonfinancial corporate obligor in the portfolio that is 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.

Under the Credit Agreement, upon the occurrence and during the continuance of an event of default (EOD), the Collateral Agent may be directed by the Majority Lenders (as defined in the Credit Agreement) to sell or otherwise dispose of the Collateral as a remedy, which could subject the Class A Loans to additional downgrade risk and/or default risk. These EODs include an Overcollateralization Ratio less than or equal to 125.0%.

Additionally, under the Credit Agreement, upon the occurrence and during the continuance of an EOD, the Facility Agent or the Majority Lenders may declare the principal and interest on all amounts payable by the Borrower due and payable. Upon that declaration, all proceeds received by the Borrower will be applied in accordance with Section 6.4 of the Credit Agreement, in which amounts due to the Class A Loans will include additional Post-Default Rate Interest Amounts and Additional Payment Amounts (as defined in the Credit Agreement). Thus, the ratings assigned to the Class A Loans could be subject to downgrade as a result of any EOD and subsequent movement to Section 6.4.

As the Coronavirus Disease (COVID-19) spread around the world, certain countries imposed quarantines and lockdowns, including the U.S., which accounts for more than one-quarter of confirmed cases worldwide. The coronavirus pandemic has negatively affected not only the economies of the nations most afflicted, 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 than others. At the same time, governments and central banks in multiple regions, including the U.S. 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 its updated commentary “Global Macroeconomic Scenarios: December Update,” published on December 2, 2020, DBRS Morningstar further considers additional adjustments to assumptions for the CLO asset class in 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.

DBRS Morningstar ran an additional higher default adjustment on the WA DBRS Morningstar Risk Score of the current collateral obligation pool and then ran this adjusted modeling pool through the DBRS 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 to achieve the rating. The results of this adjustment indicate that the Secured Notes and Combination 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; and its December 2, 2020, commentary “Global Macroeconomic Scenarios: December Update” at https://www.dbrsmorningstar.com/research/370672.

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.

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 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 December 27, 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: Arthur Krivoruk, Analyst, U.S. Structured Credit
Rating Committee Chair: Jerry van Koolbergen, Managing Director, U.S. Structured Credit
Initial Rating Date: July 30, 2019
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

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https://www.dbrsmorningstar.com/research/364310/rating-clos-and-cdos-of-large-corporate-credit

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

-- 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

-- Interest Rate Stresses for U.S. Structured Finance Transactions (October 23, 2020),
https://www.dbrsmorningstar.com/research/368786/interest-rate-stresses-for-us-structured-finance-transactions

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