DBRS Morningstar Confirms Ratings on the Class A-1 Notes Issued by Portman Ridge Funding 2018-2 Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed its AAA (sf) ratings on the Class A-1R-R Senior-Secured Revolving Floating-Rate Notes (the Class A-1R-R Notes) and the Class A-1T-R Senior-Secured Floating-Rate Notes (the Class A-1T-R Notes; together with the Class A-1R-R Notes, the Class A-1 Notes) issued by Portman Ridge Funding 2018-2 Ltd. (the Issuer or Portman Ridge CLO) pursuant to the Indenture dated as of October 18, 2018, as amended from time to time, among the Issuer; Portman Ridge Funding 2018-2 LLC as Co-Issuer; and Deutsche Bank Trust Company Americas as Trustee. DBRS Morningstar notes that the Issuer’s name was changed to Portman Ridge Funding 2018-2 Ltd. from Garrison Funding 2018-2 Ltd. pursuant to the Fourth Supplemental Indenture dated as of September 17, 2021.

The rating on the Class A-1R-R Notes addresses the timely payment of interest up to the Interest Rate Cap (as defined in the Indenture) and the ultimate payment of principal on or before the Stated Maturity (as defined in the Indenture). The rating on the Class A-1R-R Notes does not address the payment of any Class A-1R Note Additional Amount (as defined in the Indenture). The rating on the Class A-1T-R Notes addresses the timely payment of interest and the ultimate payment of principal on or before the Stated Maturity (as defined in the Indenture).

RATING RATIONALE
The rating confirmations are a result of DBRS Morningstar’s surveillance review following the transaction exiting its Reinvestment Period on November 20, 2022, and the underlying collateral pool becoming static. Given the static pool, DBRS Morningstar analyzed the actual obligations in the pool as opposed to a hypothetical pool, governed by the covenanted test limitations. DBRS Morningstar confirmed its ratings on the Class A-1 Notes as the transaction is performing within expectations.

The Class A-1 Notes issued by Portman Ridge CLO are collateralized primarily by a portfolio of U.S. senior-secured middle-market corporate loans (the Assets) and are managed by Portman Ridge Finance Corporation as Collateral Manager and Sierra Crest Investment Management LLC as Sub-Collateral Manager.

In its analysis, DBRS Morningstar considered the following aspects of the transaction:
(1) The transaction’s capital structure and the form and sufficiency of available credit enhancement.
(2) Relevant credit enhancement in the form of subordination and excess spread.
(3) The ability of the Class A-1 Notes to withstand projected collateral loss rates under various cash flow stress scenarios.
(4) The credit quality of the underlying collateral.
(5) DBRS Morningstar’s assessment of the origination, servicing, and collateralized loan obligation (CLO) management capabilities of Portman Ridge Finance Corporation, Sierra Crest Investment Management LLC, and BC Partners as Affiliate. DBRS Morningstar considers BC Partners an acceptable CLO manager.
(6) The legal structure as well as legal opinions addressing certain matters of the Issuer and the consistency with the DBRS Morningstar “Legal Criteria for U.S. Structured Finance” methodology.

Some particular strengths of the transaction are (1) significant overcollateralization (OC) cushion levels above the trigger levels, showing substantial subordination for the Class A-1 Notes, and (2) the collateral quality, which consists entirely of senior-secured middle-market loans. Some challenges are (1) failures in some of the Collateral Quality Tests and (2) some Collateral Loans in the portfolio have experienced a default.
The transaction entered its amortization period on November 20, 2022, which assumes limited reinvestment abilities. To account for the static pool, DBRS Morningstar analyzed the actual obligations in the pool as reported in the trustee report on April 3, 2023. The Coverage Tests that DBRS Morningstar modeled in its analysis are presented below:

Coverage Tests:
OC Ratio: 128.00%
Interest Coverage Ratio: 125.00%

DBRS Morningstar modeled the transaction using the DBRS CLO Asset Model and its proprietary cash flow engine, which incorporated assumptions regarding principal amortization, 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” (February 7, 2023; www.dbrsmorningstar.com/research/409499).

DBRS Morningstar analyzed each loan in the pool separately by inputting its tenor, DBRS Morningstar rating, country of origin, and industry into the DBRS CLO Asset Model. The model-based analysis, along with the cash flow engine output, produced satisfactory results, which supported the rating confirmations on the Class A-1 Notes.

The Events of Default (EODs) contain an EOD OC Ratio trigger; however, the Assets securing the Class A-1 Notes may not be sold unless the Trustee determines that the liquidation proceeds would be sufficient to repay all interest and principal on the Class A-1 Notes, or Holders of at least a majority of each Class of Class A-1 Notes (voting separately by Class) consent to and direct the sale and liquidation of the Assets (all capitalized terms as defined in the Indenture).

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: April 2023 Update” (https://www.dbrsmorningstar.com/research/413218). 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)” (https://www.dbrsmorningstar.com/research/361112).

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 www.dbrsmorningstar.com/research/396929 (May 17, 2022).

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

The principal methodologies applicable to the ratings are Rating CLOs and CDOs of Large Corporate Credit (February 7, 2023; www.dbrsmorningstar.com/research/409498) and Cash Flow Assumptions for Corporate Credit Securitizations (February 7, 2023; 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” methodology (February 7, 2023) provides a general overview of the entire rating process and details on asset analysis and the “Cash Flow Assumptions for Corporate Credit Securitizations” methodology (February 7, 2023) outlines the assumptions and analytical approach used in cash flow analysis.

The last rating action on this transaction took place on October 28, 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: Anthony Bell, Senior Analyst, U.S. Structured Credit
Rating Committee Chair: Jerry van Koolbergen, Managing Director, U.S. Structured Credit
Initial Rating Date: September 21, 2018

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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 DBRS Morningstar CLO Asset Model Version 2.3.1 (February 7, 2023), www.dbrsmorningstar.com/research/409498.

-- Cash Flow Assumptions for Corporate Credit Securitizations (February 7, 2023), www.dbrsmorningstar.com/research/409499.

-- 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 analyses 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].