DBRS Morningstar Finalizes Provisional Rating on NCL Business Loan Trust 2022-1

DBRS, Inc. (DBRS Morningstar) finalized its provisional rating on the following class of notes issued by NCL Business Loan Trust 2022-1 (NCL 2022-1):

-- $56,313,000 Class A Notes rated A (sf)

The rating is based on DBRS Morningstar’s review of the following analytical considerations:

-- The transaction assumptions consider DBRS Morningstar’s baseline macroeconomic scenarios for rated sovereign economies, available in its commentary Baseline Macroeconomic Scenarios For Rated Sovereigns December 2021 Update, published on December 9, 2021. These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse COVID-19 pandemic scenarios, which were first published in April 2020. The baseline macroeconomic scenarios reflect the view that recent COVID-19 developments, particularly the new Omicron variant with subsequent restrictions, combined with rising inflation pressures in some regions, may dampen near-term growth expectations in coming months. However, DBRS Morningstar expects the baseline projections will continue to point to an ongoing, gradual recovery.
-- DBRS Morningstar’s stressed cumulative net loss (CNL) hurdle rate of 34.96% in the cash flow scenarios commensurate with an A (sf) rating, which gave no credit for the 24 months of seasoning for the collateral pool.
-- DBRS Morningstar’s cash flow analysis tested the ability of the transaction to generate cash flows sufficient to service the interest and principal payments on the Class A Notes under two different default timing scenarios and with zero prepayment and 10% (of initial loan balance) prepayment in the beginning of Year 2.
-- The transaction’s capital structure, and form and sufficiency of available credit enhancement. The subordinated Ownership Certificates, cash held in the Reserve Account, available excess spread, and other structural provisions create credit enhancement levels that are commensurate with the rating for the Class A Notes.
-- The collateral for the transaction is represented by a discrete, amortizing pool of loans.
-- The collateral pool loans were sourced, reviewed, and underwritten relying on the same personnel and consistent with practices and on the terms utilized by Newtek Business Services Corp. (Newtek) and its affiliates for conforming SBA 7(a) loans.
-- The collateral pool is concentrated, comprising 17 loans to 13 obligors. Furthermore, the transaction has significant exposure to commercial real estate (CRE), which accounted for more than 68% of the primary collateral type (as classified by Newtek) as of the Cut-Off Date. Other primary collateral types include machinery and equipment (~13%), and accounts receivable and inventory (~7%). Loans representing approximately 61% of the collateral pool have current LTVs (as determined by Newtek and adjusted for prior liens) of between 50% and 80%. Loans representing about 81% of the aggregate collateral loan balance had LTVs of 70% or below.
-- DBRS Morningstar conducted a telephone operational risk review of Newtek. As a result, the company was deemed to be an acceptable originator and servicer of small business loan transactions. US Bank serves as the back-up servicer.
-- The legal structure and legal opinions that address the true sale of the assets to the Issuer, the non-consolidation of the special-purpose vehicle with Newtek, that the trustee has a valid first-priority security interest in the assets, and the consistency with the DBRS Morningstar Legal Criteria for U.S. Structured Finance.

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 methodologies are Rating U.S. Structured Finance Transactions (October 20, 2021), Rating CLOs and CDOs of Large Corporate Credit (February 8, 2021), and Rating CLOs Backed by Loans to European SMEs (June 28, 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.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

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

DBRS, Inc.
140 Broadway, 43rd Floor
New York, NY 10005 USA
Tel. +1 212 806-3277