DBRS Morningstar Confirms Rating on the Class A-R Loans Issued by Brightwood Capital Offshore Fund IV SPV-4, LLC

DBRS, Inc. (DBRS Morningstar) confirmed the rating of A (low) (sf) on the Class A-R Loans issued by Brightwood Capital Offshore Fund IV SPV-4, LLC up to the Total Class A-R Commitment of $128,000,000 pursuant to the Credit Agreement dated as of November 19, 2018 (as amended by the First Amendment to the Credit Agreement dated as of April 17, 2019; Second Amendment to the Credit Agreement dated as of September 11, 2019; Third Amendment to the Credit Agreement dated as of November 22, 2019; and Fourth Amendment to the Credit Agreement dated as of December 20, 2019), among Brightwood Capital Offshore Fund IV SPV-4, LLC as Borrower; Capital One, National Association (rated “A” with a Stable trend by DBRS Morningstar) as Administrative Agent for the Lenders; U.S. Bank National Association (rated AA (high) with a Stable trend by DBRS Morningstar) as Collateral Agent and Custodian; and the Lenders referred to therein.

The rating on the Class A-R Loans addresses the timely payment of interest (excluding any Excess Interest Amounts and interest attributable to the Increased Applicable Margin, each as defined in the amended Credit Agreement) and the ultimate payment of principal on or before the Stated Maturity (as defined in the amended Credit Agreement).

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

Pursuant to the Waiver and Consent to the Credit Agreement dated as of August 4, 2021, the Borrower (Brightwood Capital Offshore Fund IV SPV-4, LLC) requested that the Administrative Agent (Capital One, National Association) and the Lenders waive the Event of Default (EOD) that occurred when the Borrowers acquired and held Collateral Loans that caused the failure of the Collateral Quality Tests between March 31, 2021, and June 23, 2021. Corrective actions have been taken, and as of June 23, 2021, the transactions were in compliance with the Collateral Quality Tests. Further, the relevant parties agreed to waive the EOD pursuant to the Waiver and Consent Agreement on August 3, 2021. The Borrower changed its operational processes to prevent future occurrences. The performance of the transaction Brightwood Capital Offshore Fund IV SPV-4, LLC is within expectations.

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 rating confirmation reflects the following primary considerations:

(1) The Credit Agreement dated as of November 19, 2018, as amended from time to time;
(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 Advisors, LLC and Brightwood Capital Advisors, LLC;
(6) DBRS Morningstar’s assessment as to how collateral performance could deteriorate because of macroeconomic stresses brought about by the Coronavirus Disease (COVID-19) pandemic; and
(7) Information about the extent of the impact of the coronavirus on originations, underwriting, operations, and portfolio performance to date, which was shared with DBRS Morningstar by Brightwood SPV Advisors, LLC and Brightwood Capital Advisors, LLC.

Under the Credit Agreement, upon the occurrence and during the continuance of an EOD, the Collateral Agent may be directed by a Majority of the Controlling Class (as defined in the Credit Agreement) to sell or otherwise dispose of the Collateral as a remedy, which could disadvantage any junior classes of loans issued and subject the Class A-R Loans to additional downgrade risk and/or default risk. These EODs include a Class A 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 Administrative Agent or a Majority of the Controlling Class 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-R Loans will include additional Excess Interest Amounts and Increased Costs (as defined in the Credit Agreement). Thus, the rating on the Class A-R Loans could be subject to a downgrade as a result of any EOD and subsequent movement to Section 6.4.

The coronavirus emerged in China at the end of 2019 and has since spread to more than 150 countries in the world, including the United States. This outbreak (and any future outbreaks) of the coronavirus has led (and may continue to lead) to significant adverse disruptions to the economies of the countries in which it has arisen, as well as the global economy in general. This may result in a deterioration in the financial condition of many companies and obligors, with some experiencing the impact of such negative economic trends more than others.

As the coronavirus pandemic spread, certain countries imposed quarantines and lockdowns, including the United States, which accounts for more than one-fourth 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 United States and Europe, have taken significant measures to mitigate the economic fallout from the 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 - June 2021 Update,” published on June 18, 2021, DBRS Morningstar further considers additional adjustments to assumptions for the CLO asset class that consider the moderate economic scenario outlined in the commentary. 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. 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 there are changes in the duration or severity of the adverse disruptions.

For CLOs, 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 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 to achieve the rating. The results of this adjustment indicate that the Advances 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 June 18, 2021, updated commentary “Global Macroeconomic Scenarios - June 2021 Update” at https://www.dbrsmorningstar.com/research/380281.

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.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is Rating CLOs and CDOs of Large Corporate Credit (February 8, 2021), 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.

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

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