DBRS Morningstar Confirms Credit Ratings, Removes Under Review with Developing Implications Status From Class A Loans Issued by BTC Holdings Fund II LLC

DBRS, Inc. (DBRS Morningstar) confirmed the credit ratings on the Class A-R Loans, the Class A-T Loans, the Class A-T-1 Loans (the Class A Loans) issued by BTC Holdings Fund II LLC as follows:

-- Class A-R Loans at AA (sf)
-- Class A-T Loans at AA (sf)
-- Class A-T-1 Loans at AA (sf)

At the same time, DBRS Morningstar removed the credit ratings on the Class A Loans from Under Review with Developing Implications where they had been placed on August 21, 2023.

The Class A Loans were issued pursuant to the Credit Agreement dated as of July 1, 2021, as amended by the First Amendment to the Credit Agreement dated as of September 1, 2021, and the Omnibus Amendment dated as of April 5, 2022 (the Credit Agreement); as further amended by the Third Amendment to the Credit Agreement dated as of May 27, 2022; and the Fourth Amendment to the Credit Agreement, dated as of June 5, 2023 (the Amendment) entered into by and among BTC Holdings Fund II LLC as the Borrower; Natixis, New York Branch, as Administrative Agent; Citibank, N.A. (rated AA (low) with a Stable trend by DBRS Morningstar) as Collateral Agent; Alter Domus (US) LLC as Collateral Administrator and Collateral Custodian; and the Lenders party thereto.

The ratings on the Class A Loans address the timely payment of interest (excluding any Excess Interest Amounts, as defined in the Credit Agreement) and the ultimate payment of principal on or before the Stated Maturity (as defined in the Credit Agreement).

The Class A Loans issued by BTC Holdings Fund II LLC are collateralized primarily by a portfolio of U.S. middle-market corporate loans. BTC Holdings Fund II LLC is managed by Blue Torch Credit Opportunities Fund II LP (Blue Torch Capital). DBRS Morningstar considers Blue Torch Capital to be an acceptable collateralized loan obligation (CLO) manager.

RATING RATIONALE
The rating actions on the Class A Loans are the result of DBRS Morningstar’s review of the Amendment and 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. On August 21, 2023, DBRS Morningstar placed its credit ratings on the Class A 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 Class A Loans.

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 Class A 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.

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) Overcollateralization Ratio: 158.60%
(2) Interest Coverage Ratio: 135.00%
(3) Maximum Weighted-Average (WA) Life Test: 5.0 years
(4) Maximum Diversity Score Test: Subject to Collateral Quality Matrix; 24
(5) Maximum DBRS Morningstar Risk Score Test: Subject to Collateral Quality Matrix; 42.40%
(6) Minimum WA DBRS Morningstar Recovery Rate Test: 47.50%
(7) Minimum WA Spread Test: 6.50%
(8) Minimum WA Fixed-Rate Coupon Test: 8.00%

Some particular strengths of the transaction are (1) collateral quality that consists of primarily U.S. middle-market corporate loans and (2) the adequate diversification of the portfolio of collateral obligations. Some challenges were identified: (1) more than 7% of the portfolio holdings are First Lien Last Out or Second-Lien Loans, and (2) the underlying collateral portfolio may be insufficient to redeem the Class A Loans in an Event of Default.

As of October 5, 2023, the Borrower is in compliance with all Coverage and Collateral Quality Tests as well as all but one of the Concentration Limitations. There were 11 defaulted obligations registered in the underlying portfolio as of October 5, 2023.

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 “Global Methodology for Rating CLOs and Corporate CDOs” (October 22, 2023; https://www.dbrsmorningstar.com/research/422269). Model-based analysis produced satisfactory results, which supported the confirmation of the credit ratings on the Class A 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 Insight Model. The model-based analysis, along with the cash flow engine output, produced satisfactory results, which supported the credit rating confirmations.

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 Class A 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: July 2, 2021

DBRS, Inc.
140 Broadway, 43rd Floor
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].