DBRS Morningstar Finalizes Provisional Rating on Horizon Funding Trust 2022-1

DBRS, Inc. (DBRS Morningstar) finalized its provisional rating on the following class of asset-backed notes (the Notes) issued by Horizon Funding Trust 2022-1 (the Issuer):

-- $100,000,000 Asset-Backed Notes at 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: September 2022 Update,” published on September 19, 2022. These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse Coronavirus Disease (COVID-19) pandemic scenarios, which were first published in April 2020.
-- DBRS Morningstar's stressed cumulative net loss (CNL) hurdle rate assumption of 34.00% in the cash flow scenarios commensurate with the A (sf) rating considers the potential collateral mix at the end of the investment period (based on the limitations provided by excess concentration limits), which would maximize the advance rate and obligor concentrations.
-- DBRS Morningstar also ran stressed cash flow scenarios applied to the collateral pool as of the initial cut-off date using the stressed CNL hurdle rate of 29.16%. The scenarios reflected actual collateral’s interest and principal cash flows, the advance rate of 65.37% (adjusting for second-lien loans in the collateral mix but ignoring the excess overcollateralization available as of the initial cut-off date), and the stressed default rate reflecting actual obligor and industry concentrations.
-- Transaction’s capital structure and form and sufficiency of available credit enhancement. The overcollateralization, cash held in the reserve account, available excess spread, and other structural provisions create credit enhancement levels that are commensurate with the respective rating for the Notes.
-- The transaction has a two-year investment period (until November 2024), during which the principal collections can be reinvested by the Issuer in acquiring new collateral loans, followed by the amortization period until the Legal Final Payment Date in November 2030.
-- DBRS Morningstar completed an operational risk review of Horizon Technology Finance Corporation (Horizon) and determined it to be an acceptable originator and servicer of venture debt loans. In addition, U.S. Bank National Association acts as the Backup Servicer for the transaction.
-- The legal structure and presence of legal opinions, which address the true sale of the assets to the Issuer, the nonconsolidation of the special-purpose vehicle with the estate of Horizon, that the trust has a valid first-priority security interest in the assets, and consistency with DBRS Morningstar’s “Legal Criteria for U.S. Structured Finance.”

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (May 17, 2022).

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

The principal methodology is Rating U.S. Structured Finance Transactions – Appendix XIV: U.S. Venture Debt (November 8, 2022), 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.

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

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