DBRS Morningstar Assigns Provisional Ratings to New Mountain Guardian IV Rated Feeder I, Ltd.

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to New Mountain Guardian IV Rated Feeder I, Ltd. (the Feeder Fund), including the Class A Loan, Class A-1 Senior Secured Deferrable Fixed Rate Notes and Class A-2 Senior Secured Deferrable Floating Rate Notes (together, the Class A Debt) due 2036 at A (low), and Class B Senior Secured Deferrable Floating Rate Notes (the Class B Notes) due 2036 at BBB (low). All ratings have Stable trends. The aforementioned ratings address the ultimate payment of interest and the ultimate payment of principal on or before maturity.

The Class A Debt and Class B Notes (together, the Rated Debt) are issued by the Feeder Fund. The Feeder Fund will also issue unrated Class C Notes and Income Notes. The Feeder Fund invests in New Mountain Guardian Partners IV BDC, L.L.C. (NMG IV or the Main Fund) through its purchase of limited partnership (LP) interests in the Main Fund. The Main Fund is the fourth fund in a series of private credit funds managed by New Mountain Capital, LLC (NMC). NMC focuses on direct lending to U.S. middle and upper middle market companies and intends to pursue the same investment strategy with NMG IV as with its predecessor funds where NMC has demonstrated expertise.

NMG IV is targeting capital commitments of $750 million to $1 billion, with commitments totaling $500 million to date. The Main Fund will look to make approximately 75 to 100 investments. The investment portfolio will include first- and second-lien loans, as well as a small portion of mezzanine loans.

The expected timeline for the Main Fund is a first close in August 2023, closely followed by an initial investment date, and a final close one year from the initial investment date. The Main Fund will have a four-year investment period following the closing period and a two-year amortization period, with up to two one-year extension options. The Main Fund and the Feeder Fund are expected to have the same term, which is anticipated to be seven years.

The Feeder Fund assets will increase in size as the Main Fund calls capital to make investments. To the extent the Feeder Fund’s assets increase, the capital structure of the Feeder Fund will be maintained in a ratio of 46% Class A Debt, 8% Class B Notes, 28% Class C Notes, and 18% Income Notes. It is expected that the Feeder Fund will apply cash flows received in connection with its LP interest in the Main Fund so as to maintain the leverage ratio on the Notes. During the amortization period, interest and principal on the Class A Debt, Class B Notes, and Class C Notes will be paid sequentially.

The ratings on the Rated Debt are supported by the Feeder Fund’s LP interest in the Main Fund, which is considered a strategic investment vehicle managed by NMC. The Main Fund is the fourth in a series of funds managed by NMC, where the previous funds have demonstrated a strong investment and performance track record. Given NMC’s demonstrated track record of underwriting and risk management, as well as successful initial fundraising for the Main Fund, DBRS Morningstar has confidence in the ability to ramp NMG IV as anticipated. DBRS Morningstar has made certain assumptions around the expected asset composition and credit quality of the Main Fund investment portfolio as it ramps to a diversified pool.

DBRS Morningstar has constructed an expected investment portfolio based on NMC’s historical track record in the fund series, sample loan tape of investments, and expectations for NMG IV. Specifically, DBRS Morningstar uses its CLO Asset Model as a tool to analyze the loan portfolio based on investment-level characteristics that drive assumptions around probability of default and recoveries for each investment. These characteristics include the credit quality, domicile, maturity, obligor, industry diversity, and seniority of each debt investment. DBRS Morningstar has privately assessed the credit quality of a sample pool of debt investments and used these assessments within its modeling tools. As investments are made within NMG IV, DBRS Morningstar expects to assess the credit quality of a majority of the investments in the portfolio. These expected portfolio characteristics are aggregated to determine the fund asset coverage ratio (Fund ACR) ranges applicable to the Rated Debt.

The investments within NMG IV, which support net cash proceeds to the Feeder Fund, are expected to benefit from the track record, relationships, and expertise of NMC. NMC has demonstrated a strong historical track record in the private credit sector, specifically with expertise in direct lending to middle market and upper middle market companies based in the U.S. NMC focuses on downside protection and collateral preservation with an average loan-to-value ratio of approximately 35%. While the Main Fund is a business development company (BDC), it has a term and is not intended to be perpetual. It is similar to a GP/LP fund, but with additional regulatory requirements that increase transparency. Benefiting the Feeder Fund, the Main Fund (as a BDC) is required to distribute at least 90% of its income to maintain its BDC status and 98% of its income for beneficial tax treatment.

The Main Fund will use leverage via a maximum $250 million asset-based loan (ABL) and a $110 million subscription line. The advance rate of the subscription line is not expected to exceed 55%. This capital call facility is expected to serve as a liquidity facility only and will be paid down periodically as LPs meet capital calls. NMC expects to pay down the subscription loan facility once the NMG IV is fully called.

DBRS Morningstar analysis, which incorporates the aforementioned analytical factors, implies a rating of “A” for the Class A Debt and BBB for the Class B Notes. This rating level incorporates an investment-grade internal fund manager assessment, anticipated fund composition, quantitative modeling, and the midpoint within the Fund ACR ranges. The A (low) rating on the Class A Loan, A (low) rating on the Class A Notes, and BBB (low) rating on the Class B Notes are each one notch lower than the implied ratings mentioned above because of the effective subordination of the Rated Debt’s claim on the Main Fund assets and the senior position of the ABL and capital call facility.

If the composition of the fund were to be of a higher credit quality than anticipated or include a higher percentage of senior secured first-lien loans to corporate borrowers than expected, the ratings would be upgraded. If the BDC (Main Fund) senior secured debt is paid down and terminated, the ratings could be upgraded. The ratings would be downgraded if the asset analysis assessment is weaker than anticipated, which could be driven by (1) weaker-than-expected credit and/or recovery risk of individual investments, (2) lesser diversity of portfolio investments than planned, and/or (3) lower Fund ACRs than anticipated.

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), published on April 28, 2023. These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse Coronavirus Disease (COVID-19) pandemic scenarios, which were first published in April 2020.

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 https://www.dbrsmorningstar.com/research/396929 (May 17, 2022).

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

The principal methodology applicable to the ratings is Global Methodology for Rating Debt Issued by Investment Funds (April 18, 2023; https://www.dbrsmorningstar.com/research/412782).

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.

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

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