DBRS Morningstar Confirms Credit 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 credit 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 as follows:

-- 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)

At the same time, DBRS Morningstar removes the credit rating on the Loans from Under Review with Developing Implications status, where they had been placed on November 9, 2023.

The Loans were issued 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.

The credit ratings on the Loans 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 credit rating actions are a result of DBRS Morningstar’s review of the transaction performance by applying the “Global Methodology for Rating CLOs and Corporate CDOs” (the CLO Methodology), released on October 22, 2023. On November 9, 2023, the credit ratings were placed Under Review with Developing Implications to allow DBRS Morningstar to review the credit ratings using the CLO Methodology. The Aggregation Period end date is June 17, 2024. The Stated Maturity Date is December 25, 2031.

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.

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 prepayments, 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). DBRS Morningstar analyzed each loan in the pool separately by inputting its tenor, seniority, rating, country of origin, and industry among a few into the CLO Insight Model. Model-based analysis produced satisfactory results, which supported the confirmations of the credit ratings on the Loans.

The coverage and collateral quality test reported values and thresholds, respectively, that DBRS Morningstar used in its analysis are as follows:

Coverage Tests:
Senior Overcollateralization (OC) Test: actual 174.79%; threshold 120.00%
Junior OC Test: actual 128.90%; threshold 105.00%
Interest Coverage Test: actual 374.41%; threshold 110.00%

Collateral Quality Tests:
Maximum Risk Score Test: Subject to Collateral Quality Matrix (CQM); threshold 25.60%
Minimum Diversity Score Test: Subject to CQM; actual 15; threshold 50
Minimum WAS Test: Subject to CQM; actual 3.96%; threshold 3.60%
Required Senior Class B Investment Ratio; actual 143.58%
Required Class C Investment Ratio; 131.02%
General Advance Rate Test; actual 57.21%; threshold 80.00%

As of November 10, 2023, the transaction is failing the Maximum DBRS Morningstar Risk Score Test (reported 31.40% vs the maximum threshold of 25.60%), the Minimum Diversity Score Test (15 vs the minimum threshold of 50). These failures were considered in DBRS Morningstar’s analysis of the transaction. There were no defaulted obligations registered in the underlying portfolio as of the November 10, 2023 trustee report date.

Some particular strengths of the transaction include: (1) the par subordination at each point in the CQM is sufficient to withstand the respective rating analysis; (2) the portfolio is predominately invested in senior secured 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 Collateral Quality Matrix); and (2) the underlying collateral portfolio may be insufficient to redeem the Loans in an event of default.

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.

The transaction assumptions consider DBRS Morningstar’s baseline macroeconomic scenarios for rated sovereign economies, available in its commentary “Baseline Macroeconomic Scenarios For Rated Sovereigns: December 2023 Update,” published on December 19, 2023 (https://www.dbrsmorningstar.com/research/425506). These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse 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 methodology applicable to the credit ratings 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 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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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, 2023), https://www.dbrsmorningstar.com/research/425081

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