Morningstar DBRS Assigns Provisional Ratings to New Mountain Guardian IV Income Rated Feeder II, Ltd.

DBRS, Inc. (Morningstar DBRS) assigned provisional ratings to New Mountain Guardian IV Income Rated Feeder II, Ltd. (the Feeder Fund), including the Class A Senior Secured Deferrable Floating Rate Notes due 2036 at AA (low), Class B Senior Secured Deferrable Floating Rate Notes due 2036 at A (low), Class C Senior Secured Deferrable Floating Rate Notes due 2036 at BBB (low), and Class D Senior Secured Deferrable Floating Rate Notes due 2036 at BB (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.

KEY CREDIT RATING CONSIDERATIONS

CREDIT RATING DRIVERS
-- 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 the rating could be upgraded.

-- The rating would be downgraded if the asset analysis assessment is weaker than anticipated which could be driven by: (1) weaker than expected credit risk of investments, (2) lesser diversity of portfolio investments than planned, and/or (3) a persistently lower ACR than anticipated without a credible plan to remediate.

CREDIT RATING RATIONALE

The Class A Notes, Class B Notes, Class C Notes and Class D Notes (together, the Rated Notes) are issued by the Feeder Fund. The Feeder Fund will also issue unrated Class E Notes and Income Notes. The Feeder Fund invests in New Mountain Guardian IV Income Fund, L.L.C. (NMG Income or the Main Fund) through its purchase of BDC shares 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 Income as with its predecessor funds where NMC has demonstrated expertise.

NMG Income is targeting capital commitments of $500 million, with commitments totaling $224 million to date. The Main Fund will look to make approximately 80 investments. The investment portfolio will include first- and second-lien loans, as well as a small portion of mezzanine loans.

The Main Fund held its first close in June 2023, and final close is expected to be 12 months from the initial closing. 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.

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 56.83% Class A Notes, 11.36% Class B Notes, 4.52% Class C Notes, 5.66% Class D Notes, 10.01% Class E Notes, and 11.63% Income Notes. It is expected that the Feeder Fund will apply cash flows received in connection with its BDC shares 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 Notes, Class B Notes, Class C Notes, Class D Notes, and Class E Notes will be paid sequentially.

The ratings on the Rated Notes are supported by the Feeder Fund’s BDC shares 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. Given NMC’s demonstrated track record of underwriting and risk management, as well as successful initial fundraising for the Main Fund, Morningstar DBRS has confidence in the ability to ramp NMG Income as anticipated. Morningstar DBRS has made certain assumptions around the expected asset composition and credit quality of the Main Fund investment portfolio as it ramps to a diversified pool.

Morningstar DBRS has 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 Income. Specifically, Morningstar DBRS uses its CLO Insight 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. Morningstar DBRS has privately assessed the credit quality of a sample pool of debt investments and used these assessments within its modelling tools. As investments are made within NMG Income, Morningstar DBRS expects to assess the credit quality of a majority of the investments in the portfolio. These expected portfolio characteristics are aggregated to determine the fund asset coverage ratio (Fund ACR) ranges applicable to the Rated Notes.

The investments within NMG Income, which support net cash proceeds to the Feeder Fund, are expected to 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. It is similar to a GP/LP fund, but with additional regulatory requirements that increase transparency. 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.

NM Income will utilize a subscription facility and the subscription line can’t be used as leverage. Each draw under the subscription line must be repaid within 6 months. The current size of the subscription line is $34,400,000 and can be upsized to $125,000,000. The advance rate under the subscription loan agreement will not exceed 50%. BMO Bank, N.A. is the subscription line lead lender. NMC expects to paydown the subscription loan facility once the NMG Income is fully called.

Morningstar DBRS analysis, which incorporates the aforementioned analytical factors, implies a rating of “AA” for the Class A Notes, “A” for the Class B Notes, “BBB for the Class C Notes, and “BB” for the Class D Notes. This rating level incorporates an investment-grade internal fund manager assessment, anticipated fund composition, and quantitative modelling. Morningstar DBRS has conservatively utilized the mid-point within the Fund ACR range for the Class A Notes, based on the relatively higher implied rating of AA. Given the aforementioned factors, including the strong fund manager assessment and extensive track record, Morningstar DBRS has utilized the low end within the Fund ACR ranges for the Class B, C and D Notes. The AA (low) rating on the Class A Notes, A (low) on the Class B Notes, BBB (low) on the Class C Notes, and BB (low) rating on the Class D Notes are each one notch lower than the implied ratings mentioned above because of the effective subordination of the Rated Notes claim on the Main Fund assets.

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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/427030 (January 23, 2024).

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

The principal methodology applicable to the ratings is Global Methodology for Rating Debt Issued by Investment Funds (February 23, 2024; https://www.dbrsmorningstar.com/research/428556). In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/427030 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.

A provisional credit rating is not a final credit rating with respect to the above-mentioned securities and may change or be different than the final credit rating assigned or may be discontinued. The assignment of final credit ratings on the above-mentioned securities is subject to receipt by Morningstar DBRS of all data and/or information and final documentation that Morningstar DBRS deems necessary to finalize the credit ratings.

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.

Morningstar DBRS 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.

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