DBRS Morningstar Confirms Credit Ratings on the Loans of ABPCI Pacific Funding LP, Removes Under Review with Developing Implications Status

DBRS, Inc. (DBRS Morningstar) confirmed its credit ratings on the Class A-R-1 Loans, the Class A-T-1 Loans, the Class A-R-2 Loans, the Class A-T-2 Loans, and the Class B Loans (together, the Loans) issued by ABPCI Pacific Funding LP as follows:

-- Class A-R-1 Loans at AA (sf)
-- Class A-T-1 Loans at AA (sf)
-- Class A-R-2 Loans at AA (sf)
-- Class A-T-2 Loans at AA (sf)
-- Class B Loans at AA (low) (sf)

At the same time, DBRS Morningstar removed the Under Review with Developing Implications status of the credit ratings, where they were placed on November 9, 2023.

The Loans were issued pursuant to the Credit Agreement dated November 1, 2022, as amended by Amendment No. 1 to the Credit Agreement dated May 26, 2023, among ABPCI Pacific Funding LP, as Borrower; ABPCI Pacific Funding RR LP acting through its general partner, ABPCI Pacific Funding RR GP Ltd., as Retention Provider; Natixis, New York Branch, as Administrative Agent; U.S. Bank Trust Company, National Association, as Collateral Agent, Collateral Administrator, and Custodian; and the Lenders and the Equity Investors party thereto, as well as the amendment to the Collateral Management Agreement, dated as of May 26, 2023, between the Borrower and Collateral Manager.

The credit ratings on the Loans address the timely payment of interest (excluding Capped Amounts and the additional 2% interest payable at the Post-Default Rate) (as defined in the Credit Agreement referred to above) and the ultimate payment of principal on or before the Stated Maturity (as defined in the Credit Agreement referred to above).

CREDIT RATING RATIONALE
The credit rating actions are a result of DBRS Morningstar’s review of the transaction performance and application of 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 Reinvestment Period ends November 1, 2024. The Stated Maturity is November 3, 2031.

The Borrower is a bankruptcy-remote special-purpose vehicle established by AB Private Credit Investors LLC (ABPCI) as the Collateral Manager. The Loans are collateralized primarily by a portfolio of U.S. middle-market corporate loans and other corporate obligations. ABPCI Pacific Funding LP is managed by ABPCI, an affiliate of AllianceBernstein L.P. DBRS Morningstar considers ABPCI an acceptable collateralized loan obligation (CLO) manager.

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

(1) The Credit Agreement, dated November 1, 2022, as amended by Amendment No. 1 to the Credit Agreement, dated as of May 26, 2023.
(2) The integrity of the transaction structure.
(3) DBRS Morningstar’s assessment of the portfolio quality.
(4) Adequate credit enhancement to withstand projected collateral loss rates under various cash flow stress scenarios.
(5) DBRS Morningstar’s assessment of the origination, servicing, and CLO management capabilities of ABPCI.
(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.

Some particular strengths of the transaction are (1) the collateral quality, which consists mostly of senior-secured
middle market loans; (2) the adequate diversification of the portfolio of collateral obligations (Diversity Score,
matrix driven); and (3) the Collateral Manager’s expertise in CLOs and overall approach to selection of Collateral Obligations.

Some challenges were identified: (1) the expected weighted-average (WA) credit quality of the underlying obligors may fall below investment grade (per the Collateral Quality Matrix) and the majority may not have public ratings once purchased and (2) the underlying collateral portfolio may be insufficient to redeem the Loans in an Event of Default.

DBRS Morningstar monitors transaction performance metrics based on the periodicity of the transaction’s reporting. The performance metrics include Collateral Quality Tests, Coverage Tests, Concentration Limitations, and Performing Collateral Par. As of November 13, 2023, the transaction performance is within DBRS Morningstar’s expectation, which supports the confirmations 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:
Overcollateralization (OC) Test: Subject to Collateral Quality Matrix (CQM) current 193.32%; threshold 153.33%
Interest Coverage Test: current 233.26%; threshold 150.00%

Collateral Quality Tests:
Maximum Risk Score Test: Subject to Collateral Quality Matrix (CQM); current 33.77%; threshold 38.00%
Minimum Diversity Score Test: Subject to CQM; current 33; threshold 16
Minimum WAS Test: Subject to CQM; current 4.99%; threshold 4.75%
Minimum WA DBRS Morningstar Recovery Rate Test: Subject to CQM; current 51.80%; threshold 48.70%

As of November 13, 2023, the transaction is failing the Concentration Limitation for Recurring Revenue Loan Assets (27.20% vs the maximum threshold of 25.00%). However, the transaction assigns Senior Secured Bond recovery rates to Recurring Revenue Loan Assets when calculating the Minimum WA DBRS Morningstar Recovery Rate Test (as defined in the Credit Agreement), which is in compliance. Therefore, no analytical adjustment was needed for the breached concentration limitation. There were no defaulted obligations registered in the underlying portfolio as of the November 13, 2023 trustee report date.

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 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 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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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, 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].