DBRS Morningstar Confirms Rating on the Class A-1 Notes Issued by Deerpath Capital CLO 2020-1 Ltd. and Deerpath Capital CLO 2020-1 LLC

DBRS, Inc. (DBRS Morningstar) confirmed its rating of AAA (sf) on the Class A-1 Notes issued by Deerpath Capital CLO 2020-1 Ltd. and Deerpath Capital CLO 2020-1 LLC under the Indenture dated as of April 7, 2020, among Deerpath Capital CLO 2020-1 Ltd. as the Issuer, Deerpath Capital CLO 2020-1 LLC as the Co-Issuer, and U.S. Bank National Association (rated AA (high) with a Stable trend by DBRS Morningstar) as the Trustee.

The rating on the Class A-1 Notes addresses the timely payment of interest and the ultimate payment of principal on or before the Stated Maturity (as defined in the Indenture referenced above).

RATING RATIONALE
The rating action is a result of the annual surveillance review of the transaction. DBRS Morningstar confirmed the rating on the Class A-1 Notes as the current transaction performance is within DBRS Morningstar’s expectation. The Stated Maturity is April 17, 2032. The Reinvestment Period ends on April 17, 2023.

The Class A-1 Notes issued by Deerpath Capital CLO 2020-1 Ltd. and Deerpath Capital CLO 2020-1 LLC are collateralized primarily by a portfolio of U.S. middle-market corporate loans. Deerpath Capital Management, LP is the Collateral Manager for this transaction.

In its analysis, DBRS Morningstar considered the following aspects of the transaction:

(1) The Indenture dated as of April 7, 2020.
(2) The integrity of the transaction structure.
(3) Adequate credit enhancement to withstand DBRS Morningstar’s projected collateral loss rates under various cash flow stress scenarios.
(4) The credit quality of the underlying collateral, which consists primarily of floating-rate middle-market loans.
(5) DBRS Morningstar’s assessment of the origination, servicing, and collateralized loan obligation management capabilities of Deerpath Capital Management, LP.

The transaction has a dynamic structural configuration that permits variations of certain asset metrics via a selection of an applicable row from an asset quality matrix (the AQM, as defined in Section 7.18(h) of the Indenture). Depending on a given Diversity Score (DScore), the following metrics are selected accordingly from the applicable row of the AQM: DBRS Morningstar Risk Score and weighted-average (WA) Spread Level. DBRS Morningstar analyzed each structural configuration (row) as a unique transaction, and all configurations passed the applicable DBRS Morningstar rating stress levels.

The Coverage Tests and triggers as well as the Collateral Quality Tests that DBRS Morningstar modeled during its analysis are presented below:

Minimum WA Spread Test: Subject to the AQM
Maximum DBRS Morningstar Risk Score Test: 69.62%, subject to the AQM
Minimum Diversity Score Test: 25, subject to the AQM
Minimum WA DBRS Morningstar Recovery Rate Test: greater than or equal to 46.00%
Minimum Overcollateralization Test: 139.90%
Maximum WA Life Test: 5.22 years
Interest Coverage Ratio: 115.00%

Some particular strengths of the transaction are (1) the asset quality, which consists mostly of floating-rate middle-market loans and (2) the adequate diversification of the portfolio of collateral obligations (the current DScore of 30 compared with the test level of 25). Some challenges are (1) up to 15% of the portfolio may consist of Covenant-Lite loans and (2) the underlying collateral portfolio may be insufficient to redeem the Class A-1 Notes in an Event of Default.

The transaction is performing according to the contractual requirements of the Indenture. As of March 14, 2023, the latest data available, the Borrower is in compliance with all other Coverage and Asset Quality Tests, as well as the Concentration Limitation tests. There were no defaulted obligations registered in the underlying portfolio as of March 14, 2023.

DBRS Morningstar modeled the transaction using the DBRS Morningstar CLO Asset Model and its proprietary cash flow engine, which incorporated assumptions regarding principal amortization, the amount of interest generated, default timings, and recovery rates, among other credit considerations referenced in the DBRS Morningstar rating methodology “Cash Flow Assumptions for Corporate Credit Securitizations.” Model-based analysis produced satisfactory results, which supported the confirmation of the rating on the Class A-1 Notes.

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 ratings to a facility.

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 2022 Update,” published on December 21, 2022 (https://www.dbrsmorningstar.com/research/407678). These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse Coronavirus Disease (COVID-19) pandemic scenarios, which were first published in April 2020.

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.

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 methodologies applicable to the rating are Rating CLOs and CDOs of Large Corporate Credit (February 7, 2023; https://www.dbrsmorningstar.com/research/409498) and Cash Flow Assumptions for Corporate Credit Securitizations (February 7, 2023; https://www.dbrsmorningstar.com/research/409499).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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 for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings:

Each of the principal asset class methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, the “Rating CLOs and CDOs of Large Corporate Credit” (February 7, 2023) methodology provides a general overview of the entire rating process and details on asset analysis. The “Cash Flow Assumptions for Corporate Credit Securitizations” (February 7, 2023) methodology outlines the assumptions and analytical approach used in cash flow analysis.

The last rating action on this transaction took place on April 13, 2022.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Oxana Rhybak, Vice President, U.S. Structured Credit
Rating Committee Chair: Jerry van Koolbergen, Managing Director, U.S. Structured Credit
Initial Rating Date: March 5, 2020.

DBRS, Inc.
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New York, NY 10005 USA
Tel. +1 212 806-3277

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Rating CLOs and CDOs of Large Corporate Credit and CLO Asset Model Version 2.2.3.1 (February 7, 2023), https://www.dbrsmorningstar.com/research/409498

-- Operational Risk Assessment for Collateralized Loan Obligation (CLO) and Collateralized Debt Obligation (CDO) Managers of Large Corporate Credits (September 23, 2022), https://www.dbrsmorningstar.com/research/403042

-- Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022), https://www.dbrsmorningstar.com/research/402153

-- Legal Criteria for U.S. Structured Finance (December 7, 2022), https://www.dbrsmorningstar.com/research/407008

A description of how DBRS Morningstar analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/278375.

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