DBRS Morningstar Confirms Ratings on the Funded Class B-1 Loans, Funded Class B-2 Loans, and Funded Class C Loans of NPC Funding IX, Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed the following ratings on the Funded Class B-1 Loans, the Funded Class B-2 Loans, and the Funded Class C Loans (together, the Loans) issued by NPC Funding IX Ltd. pursuant to the Revolving Loan Agreement dated as of July 30, 2021, as amended pursuant to the First Amendment to the Revolving Loan Agreement, dated as of September 30, 2021, the Second Amendment to the Revolving Loan Agreement, dated as of March 18, 2022, and the Third Amendment to the Revolving Loan Agreement, dated as of August 17, 2023, by and among NPC Funding IX Ltd. as Borrower; First Eagle Alternative Credit, LLC (First Eagle) as Collateral Manager; U.S. Bank, N.A. as Collateral Custodian; Royal Bank of Canada as Administrative Agent and Revolving Lender; the Lenders and the collateralized loan obligation (CLO) Subsidiary from time to time thereto:

-- Funded Class B-1 Loans at BBB (low) (sf)
-- Funded Class B-2 Loans at BB (low) (sf)
-- Funded Class C Loans at BB (low) (sf)

The above ratings address the ultimate payment of interest (excluding the Subordinated Loan Interest Amount as defined in the amended Revolving Loan Agreement) and the ultimate payment of principal on or before the Facility Maturity Date (as defined in the amended Revolving Loan Agreement). For the avoidance of doubt, the ratings do not address the repayment of the Cure Amounts (as defined in the amended Revolving Loan Agreement).

CREDIT RATING RATIONALE
The rating actions are a result of the execution of the Third Amendment to the Revolving Loan Agreement (the Amendment), dated as of August 17, 2023. The Amendment extends the Aggregation Period to June 17, 2024, from June 17, 2023, and extends the Call Date of the transaction. The Stated Maturity Date of the transaction is December 25, 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, incorporating the changes pursuant to the Amendment.

The Loans are collateralized primarily by a portfolio of U.S. broadly syndicated corporate loans. First Eagle is the Collateral Manager for this transaction. DBRS Morningstar considers First Eagle to be an acceptable CLO collateral manager.

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

-- The Revolving Loan Agreement, as amended by the Amendment.
-- The integrity of the transaction structure.
-- DBRS Morningstar’s assessment of the portfolio quality.
-- Adequate credit enhancement to withstand DBRS Morningstar’s projected collateral loss rates under various cash flow-stress scenarios.
-- DBRS Morningstar’s assessment of the origination, servicing, and CLO management capabilities of First Eagle.

Some particular strengths of the transaction include (1) the par subordination at each point in the DBRS matrix (CQM) is sufficient to withstand the respective rating analysis, (2) the portfolio is predominately invested in first-lien loans, and (3) the Borrower is a bankruptcy-remote entity and is limited in its permitted activities. Some challenges identified include (1) the expected weighted-average (WA) credit quality of the underlying obligors may fall below investment grade (per the CQM) 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 which permits variations of certain asset metrics via a selection of an applicable row from the CQM. The following metrics will be selected accordingly from the applicable row of the CQM (as defined in Schedule XII of the Revolving Loan Agreement): Minimum DBRS Diversity Score, Maximum DBRS Morningstar Risk Score, DBRS Morningstar WA Spread (WAS), WA Life, General Advance Rate, Required Senior Class B Investment Level, and Required Class C Investment Level. DBRS Morningstar analyzed each structural configuration in the CQM as a unique transaction and all rows passed the applicable DBRS Morningstar rating stress levels.

The collateral quality tests as well as the coverage tests and triggers that DBRS Morningstar utilized during its analysis are presented below:

Coverage Tests:
Senior Overcollateralization (OC) Test: 120.00%
Junior OC Test: 105.00%
Interest Coverage Test: 110.00%

Collateral Quality Tests:
Maximum Risk Score Test: 23.60% to 30.00%
Minimum Diversity Score Test: 10 to 50
Minimum WAS Test: 3.00% to 3.90%
Minimum WA Life Test: 5.14 years since the Third Amendment date
Minimum WA DBRS Morningstar Recovery Rate: Class B-1 Loan: 65% to 66%; Class B-2 Loan: 72.85% to 74%; Class C Loan: 72.85% to 74%

DBRS Morningstar utilized the following concentration limitations as defined in the Revolving Loan Agreement:

Fixed Rate Obligations: Maximum 5.0%
Single-Obligor Exposure: Maximum 1.5%; five exceptions at 2.0%
DBRS Morningstar Industry: Maximum 8.0%

DBRS Morningstar analyzed 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 support the confirmation of the rating on the Loans.
For more information regarding DBRS Morningstar’s additional adjustment for select industries related to the coronavirus, please see its May 18, 2020, commentary titled “CLO Risk Exposure to the Coronavirus Disease (COVID-19)” (https://www.dbrsmorningstar.com/research/361112).

The transaction assumptions consider DBRS Morningstar’s baseline macroeconomic scenarios for rated sovereign economies, available in its June 30, 2023, commentary titled “Baseline Macroeconomic Scenarios for Rated Sovereigns: June 2023 Update” (https://www.dbrsmorningstar.com/research/416703). These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse 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/416784 (July 4, 2023).

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 credit rating was initiated at the request of the rated entity.

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

This is a solicited credit rating.

DBRS, Inc.
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Tel. +1 212 806-3277

The credit 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

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