DBRS Morningstar Upgrades Rating on Loans of Brightwood Fund III Static 2021-1, LLC

DBRS, Inc. (DBRS Morningstar) upgraded its rating on the Loans issued by Brightwood Fund III Static 2021-1, LLC (the Borrower) to AAA (sf) from AA (sf). The Loans are issued pursuant to the Credit Agreement dated as of June 30, 2021, among the Borrower, the Lenders referred to therein, and U.S. Bank National Association (rated AA (high) with a Stable trend by DBRS Morningstar) as Collateral Agent, Custodian, and Administrative Agent.

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

RATING RATIONALE
The rating actions are a result of DBRS Morningstar’s annual surveillance review. The Stated Maturity is April 15, 2028. The rationale for the upgrade of the rating on the Loans is that the static pool analysis produced lower expected losses, given the greater certainty about the underlying static pool of assets. 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. The actual pool analysis produced better-than-expected loss results, which warranted the upgrade. In addition, some deleveraging has occurred in the transaction since DBRS Morningstar's last rating action on the Loans was taken on June 30, 2022, which improved overcollaterization ratios and provided stronger cushion levels.

In its analysis, DBRS Morningstar considered the following aspects of the transaction:
(1) The Credit Agreement dated June 30, 2021.
(2) The integrity of the transaction structure.
(3) DBRS Morningstar’s assessment of the portfolio quality.
(4) Adequate credit enhancement to withstand projected collateral loss rates under various cash flow stress scenarios.
(5) DBRS Morningstar’s assessment of the origination, servicing, and collateralized loan obligation management capabilities of Brightwood SPV Advisors, LLC.

The Loans issued by Brightwood Fund III Static 2021-1, LLC are collateralized primarily by a portfolio of U.S. middle-market corporate loans. This portfolio is static in nature and does not allow for reinvestment. Brightwood Fund III Static 2021-1, LLC is managed by Brightwood SPV Advisors, LLC. DBRS Morningstar considers Brightwood SPV Advisors, LLC to be an acceptable collateralized loan obligation manager.

To account for a static pool, DBRS Morningstar analyzed the actual obligations in the pool as reported in the trustee report on May 1, 2023, accounting for one defaulted obligor. The Coverage Tests that DBRS Morningstar modeled in its analysis are presented below.

Coverage Tests:
Overcollateralization Ratio: 201.10%
Interest Coverage Ratio: 150.00%

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 rating of AAA (sf) on the Loans.

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

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.

Under the Credit Agreement, upon the occurrence and during the continuance of an Event of Default, the Administrative Agent or a Majority may declare the principal and interest on all amounts payable by the Borrower due and payable. Upon that declaration, all proceeds received by the Borrower will be applied in accordance with Section 6.4, in which amounts due to the Loans will include additional Excess Interest Amounts and Increased Costs (as defined in the Credit Agreement referred to above). Thus, the rating assigned to the Loans is subject to downgrade as a result of these additional Excess Interest Amounts in the event of any Event of Default and movement to Section 6.4.

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 pandemic, 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 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.

DBRS, Inc.
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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 2.2.3.1 (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 (June 9, 2023), www.dbrsmorningstar.com/research/415687

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].