DBRS Morningstar Confirms AA (sf) Ratings on the Class A-D, Class A-R, Class A-T, and Class A-T-1 Loans and Subsequently Discontinues Rating on the Class A-D Loans of BTC Holdings Fund II LLC

DBRS, Inc. (DBRS Morningstar) confirmed its AA (sf) ratings on the Class A-R Loans, the Class A-T Loans, the Class A-T-1 Loans (the Loans), and the Class A-D Loans issued by BTC Holdings Fund II LLC. DBRS Morningstar also subsequently discontinued its rating on the Class A-D Loans, given that the Class A-D Commitments have been terminated and the Class A-D Loans were fully repaid through the conversion to the Class A-T Loans.

The Loans and the Class A-D Loans were issued pursuant to the Credit Agreement dated as of July 1, 2021 (as amended by the First Amendment to the Credit Agreement dated as of September 1, 2021, and the Omnibus Amendment dated as of April 5, 2022) (the Credit Agreement), and as further amended by the Third Amendment to the Credit Agreement dated as of May 27, 2022, entered into by and among BTC Holdings Fund II LLC as the Borrower; Natixis, New York Branch, as Administrative Agent; Citibank, N.A. (rated AA (low) with a Stable trend by DBRS Morningstar) as Collateral Agent; Alter Domus (US) LLC as Collateral Administrator and Collateral Custodian; and the Lenders party thereto.

The ratings on the Loans address the timely payment of interest (excluding any Excess Interest Amounts, as defined in the Credit Agreement) and the ultimate payment of principal on or before the Stated Maturity (as defined in the Credit Agreement).

The Loans issued by BTC Holdings Fund II LLC are collateralized primarily by a portfolio of U.S. middle-market corporate loans. BTC Holdings Fund II LLC is managed by Blue Torch Credit Opportunities Fund II LP (Blue Torch Capital). DBRS Morningstar considers Blue Torch Capital to be an acceptable collateralized loan obligation (CLO) manager.

RATING RATIONALE
The rating actions are a result of DBRS Morningstar’s surveillance review. The reinvestment period end date is July 15, 2023. The Stated Maturity is April 15, 2031. The rating rationale for the confirmation of the ratings on the Loans is that the current transaction performance is within DBRS Morningstar’s expectations.

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 Loans to withstand projected collateral loss rates under various cash flow stress scenarios.
(4) The credit quality of the underlying collateral and the ability of the transaction to reinvest Principal Proceeds into new Collateral Obligations, subject to the Eligibility Criteria, which include testing the Concentration Limitations, Collateral Quality Tests, and Coverage Tests.
(5) DBRS Morningstar’s assessment of the origination, servicing, and CLO management capabilities of Blue Torch Capital as the Collateral Manager.

Some particular strengths of the transaction are (1) collateral quality that consists of primarily U.S. middle-market corporate loans, and (2) the adequate diversification of the portfolio of collateral obligations (Diversity Score (DScore) of 26.77). Some challenges were identified as follows: (1) up to 5% of the portfolio pool may consist of Specified Non-Paying Loans, and (2) the underlying collateral portfolio may be insufficient to redeem the Loans in an Event of Default.

The transaction has a dynamic structural configuration that permits variations of certain asset metrics via a selection of an applicable row from a collateral quality matrix (the CQM, as defined in Schedule F of the Credit Agreement). Depending on a given DScore, the following metrics are selected accordingly from the applicable row of the CQM: DBRS Morningstar Risk Score, Advance Rate, Overcollateralization (OC) Levels, and Equity Distribution Test. DBRS Morningstar analyzed each structural configuration as a unique transaction and all configurations (rows) 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.

Tests:
Weighted-Average Spread: 6.50%
Weighted-Average Coupon: 8.00%
IC Test: 135.00%
OC Test: Matrix driven, minimum 158.6%

The transaction is performing according to the parameters of the Credit Agreement. As of April 6, 2023, the Borrower is in compliance with all Coverage and Collateral Quality Tests, as well as the Concentration Limitation tests. Six obligors defaulted in the underlying portfolio to date.

DBRS Morningstar modeled the transaction using the DBRS Morningstar 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.” Model-based analysis produced satisfactory results that supported the ratings of AA (sf) on the Loans.

Considering the transaction performance, its legal aspects, and the results produced by the models, DBRS Morningstar confirmed its ratings of AA (sf) on the Loans issued by BTC Holdings Fund II LLC.

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, 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 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, “Rating CLOs and CDOs of Large Corporate Credit” (February 7, 2023) provides a general overview of the entire rating process and details on asset analysis. “Cash Flow Assumptions for Corporate Credit Securitizations” (February 7, 2023) outlines the assumptions and analytical approach used in cash flow analysis.

The last rating action on this transaction took place on May 31, 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: July 2, 2021.

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 DBRS Morningstar CLO Asset Model Version 2.2.3.1 (February 7, 2023), www.dbrsmorningstar.com/research/409498

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

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

-- 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

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].