DBRS Morningstar Upgrades and Confirms Ratings on the Collateralized Fund Obligation Notes Issued by MCA Fund III Holding LLC

DBRS, Inc. (DBRS Morningstar) confirmed and upgraded its ratings on the following Notes issued by MCA III Holding LLC (the Issuer) pursuant to the Indenture dated October 28, 2020, between MCA Fund III Holding LLC, as the Issuer, and Wells Fargo Bank, N.A. (rated AA with a Negative trend by DBRS Morningstar), as the Trustee and Calculation Agent.

-- Class A Notes confirmed at A (sf)
-- Class B Notes upgraded to BBB (high) (sf) from BBB (sf)
-- Class C Notes confirmed at BB (sf)

The ratings on the Class A Notes, the Class B Notes, and the Class C Notes (collectively, the Notes) address the ultimate payment of interest and the ultimate payment of principal on or before the Final Maturity Date (as defined in the Indenture referenced above).

RATING RATIONALE/DESCRIPTION
The rating actions reflect the overall stable performance of the transaction since issuance. The transaction is supported by a portfolio of limited-partnership interests in leveraged buyout, mezzanine debt, secondaries, and venture capital of 71 private-equity funds with a total portfolio net-asset-value (NAV) of $688 million as of August 2021, up from $574 million in June 2020 recoveries/revisions in NAV and drawdown of capital calls for investment purposes are the primary drivers for the significant increase in portfolio NAV.

The Class A Notes and the Class B Notes have been deleveraging in accordance to the target loan-to-value ratios (LTVs) supported by cash distributions from strong performing sectors such as buyout and mezzanine. As of the August 2021 payment date, credit enhancement (CE) to the Notes increased since transaction inception:

-- Class A: CE increased to 68.09% from 60.01%
-- Class B: CE increased to 54.13% from 42.50%
-- Class C: CE increased to 43.69% from 30.01%

Each class of Notes is able to withstand a percentage of tranche defaults from a Monte Carlo asset analysis commensurate with its respective rating. The respective rating actions for each of the Notes differ from the ratings implied by the quantitative model, which would have been higher than the confirmed and upgraded ratings. DBRS Morningstar considers these differences to be a material deviation from the model. The highest achievable rating for all rated Notes is capped at A (sf) due to the exposure to the counterparty risk in the form of future capital calls. The transaction depends on the ability of Life Insurance Company (CMFG) to fund the future unfunded commitments.

The ratings reflect the following primary considerations:

(1) The Indenture, dated October 28, 2020.
(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 portfolio management capabilities of MEMBERS Capital Advisors, Inc. as the Investment Manager.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an immediate economic contraction, leading in some cases to increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may continue to increase in the coming months for many transactions. The ratings are based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus.

ESG CONSIDERATIONS
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 U.S. Collateralized Fund Obligations Backed by Private Equity (October 15, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

DBRS Morningstar materially deviated from its predictive model when determining the rating actions assigned to each of the Class A Notes, the Class B Notes, and the Class C Notes, respectively, by a three or more notch differential. The material deviations are warranted, given the dependency of the transaction on the ability of CMFG Life Insurance Company to fund the future unfunded commitments.

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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