DBRS Morningstar Upgrades Credit Rating, Removes Under Review with Developing Implications Status From Class A-T Loans Issued by BTC Holdings Fund I, LLC

DBRS, Inc. (DBRS Morningstar) upgraded the credit rating on the Class A-T Loans (the Loans) issued by BTC Holdings Fund I, LLC (the Borrower) to AAA (sf) from AA (high) (sf). At the same time, DBRS Morningstar removed the credit rating on the Loans from Under Review with Developing Implications where they had been placed on August 21, 2023.

The Loans were issued pursuant to the Amended and Restated Credit Agreement dated as of January 28, 2021; as further amended by the First Amendment to the Amended and Restated Credit Agreement, dated as of August 27, 2021; the Second Amendment to the Amended and Restated Credit Agreement, dated as of December 20, 2021; and the Third Amendment to the Amended and Restated Credit Agreement, dated as of June 5, 2023, (the Amendment) among the Borrower; the Lenders referred to therein; Natixis, New York Branch as Administrative Agent U.S. Bank Trust Company, National Association (rated AA (high) with a Negative trend by DBRS Morningstar) as Collateral Agent; and U.S. Bank National Association (rated AA (high) with a Negative trend by DBRS Morningstar) as Custodian.

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

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

RATING RATIONALE
The rating action on the Loans is a result of (1) the amortization of the portfolio and significant deleveraging of the transaction, now that the deal is past its reinvestment period; (2) DBRS Morningstar’s review of the Amendment; and (3) the application by DBRS Morningstar of the “Global Methodology for Rating CLOs and Corporate CDOs,” including the DBRS CLO Insight Model, released on October 22, 2023. The upgrade of the credit rating is supported by DBRS Morningstar’s model-based analysis, which produced satisfactory results for the upgrade rating action. On August 21, 2023, DBRS Morningstar placed its credit ratings on the Loans Under Review with Developing Implications to analyze the transaction pursuant to the Amendment, which transitioned the transaction’s benchmark from Libor to SOFR and increased the Applicable Margin of the Loans. The Reinvestment Period ended on January 5, 2021. The Stated Maturity of the Loans is March 25, 2027.

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.
(6) The legal structure as well as legal opinions addressing certain matters of the Borrower and the consistency with the DBRS Morningstar “Legal Criteria for U.S. Structured Finance” methodology.

This portfolio is static in nature and allows limited reinvestment. To account for a static pool, DBRS Morningstar analyzed the actual obligations in the pool as reported in the trustee report as of October 5, 2023. The Coverage Tests and triggers as well as the Collateral Quality Tests that DBRS Morningstar utilized in its analysis are presented below:

(1) Advance Rate: 55.00%
(2) Overcollateralization (OC) Test: 184.00%
(3) Interest Coverage (IC) Test: 150.00%
(4) Minimum Weighted-Average (WA) Spread Test: 6.50%
(5) Maximum WA Life Test: 0.50 years

As of October 5, 2023, the Borrower is in compliance with all Coverage and Collateral Quality Tests, except the Weighted Average Life Test. There were no defaulted obligations registered in the underlying portfolio as of October 5, 2023.

Some particular strengths of the transaction are (1) significant deleveraging of the transaction, (2) the collateral quality that consists of primarily U.S. middle-market corporate loans and (3) no defaulted obligations are registered in the underlying portfolio as of October 5, 2023. Some challenges were identified as follows: the underlying collateral portfolio is highly concentrated across 12 obligors with a reported diversity score of 6.4.

DBRS Morningstar analyzed the transaction using the DBRS Morningstar CLO Insight Model and its proprietary cash flow engine, which incorporated assumptions regarding principal amortization, amount of interest generated, principal pre-payments, default timings, and recovery rates, among other credit considerations referenced in the DBRS Morningstar DBRS Morningstar “Global Methodology for Rating CLOs and Corporate CDOs” (October 22, 2023; https://www.dbrsmorningstar.com/research/422269).

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

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 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 transaction assumptions consider DBRS Morningstar’s baseline macroeconomic scenarios for rated sovereign economies, available in its commentary “Baseline Macroeconomic Scenarios for Rated Sovereigns: September 2023 Update,” published on September 28, 2023 (https://www.dbrsmorningstar.com/research/421227). These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse 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 Disease (COVID-19) pandemic, please see its May 18, 2020, commentary, “CLO Risk Exposure to the Coronavirus Disease (COVID-19)” at https://www.dbrsmorningstar.com/research/361112.

ENVIRONMENTAL, SOCIAL, AND 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 methodology applicable to the credit rating is the Global Methodology for Rating CLOs and Corporate CDOs and the DBRS Morningstar CLO Insight Model (v.1.0.0.0) (October 22, 2023; https://www.dbrsmorningstar.com/research/422269).

Other methodologies referenced in this transaction are listed at the end of this press release.

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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

This credit 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 credit ratings:

The last credit rating action on this transaction took place on August 21, 2023, when DBRS Morningstar placed the credit ratings on the Loans Under Review with Developing Implications.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. 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: John Um, Vice President, Structured Credit
Rating Committee Chair: Jerry van Koolbergen, Managing Director, Structured Credit
Initial Rating Date: March 25, 2019

DBRS, Inc.
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New York, NY 10005 USA
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.

-- Operational Risk Assessment for Collateralized Loan Obligations (CLOs) and Corporate Collateralized Debt Obligations (CDOs) (September 14, 2023; https://www.dbrsmorningstar.com/research/420608)

-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

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

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