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

DBRS, Inc. (DBRS Morningstar) assigned final ratings to debt obligations of 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 the 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. 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. As of June 30, 2023, NMG IV has purchased $247.5 million in investments.

The expected timeline for the Main Fund is a first close on August 22, 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. DBRS Morningstar considers NMC’s track record of underwriting, risk management, and initial fundraising for the Main Fund when evaluating NMC’s ability to ramp NMG IV as anticipated. DBRS Morningstar assumes certain asset composition and credit quality of the Main Fund investment portfolio in its analysis during the ramp-up period.

DBRS Morningstar 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. As investments are made within NMG IV, DBRS Morningstar expects to assess the credit quality of a majority of the investments in the portfolio. DBRS Morningstar aggregates expected portfolio characteristics to assess the fund asset coverage ratio (Fund ACR) ranges applicable to the Rated Debt.

The investments within NMG IV support net cash proceeds to the Feeder Fund, which 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. BDCs resemble GP/LP funds with additional disclosure requirements. 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’s 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 analysis, and the midpoint within the Fund ACR ranges. The A (low) rating on the Class A Debt 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, DBRS Morningstar would upgrade the ratings. If the BDC (Main Fund) senior secured debt were to be paid down and terminated, DBRS Morningstar could upgrade the ratings. DBRS Morningstar would downgrade the ratings if the asset analysis assessment were 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.

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 (July 4, 2023).

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

The principal methodology is the Global Methodology for Rating Debt Issued by Investment Funds (April 18, 2023; https://www.dbrsmorningstar.com/research/412782). In addition, DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (https://www.dbrsmorningstar.com/research/396929) in its consideration of ESG factors.

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

The primary sources of information used for this credit rating include Morningstar, Inc. and Company Documents. DBRS Morningstar considers the information available to it for the purposes of providing this credit rating was of satisfactory quality.

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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

DBRS, Inc.
140 Broadway, 43rd Floor
New York, NY 10005 USA
Tel. +1 212 806-3277