Morningstar DBRS Assigns Provisional Credit Ratings to the Loans Issued by BTC Offshore Holdings Fund III-B LLC

DBRS, Inc. (Morningstar DBRS) assigned the following provisional credit ratings to the Class A-R Loans, Class A-T Loans, Class A-D-1 Loans, and Class A-D-2 Loans (together, the Loans) issued by BTC Offshore Holdings Fund III-B LLC as the Borrower; Natixis, New York Branch as Administrative Agent; Citibank, N.A. as Collateral Agent; Alter Domus (US) LLC as Collateral Administrator and Collateral Custodian; and the Lenders party thereto:

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

The provisional credit ratings on the Loans address the timely payment of interest (excluding the Excess Interest Amounts and the additional 2% interest payable at the Post-Default Rate, as defined in the Credit Agreement) and ultimate return of principal due on or before the Stated Maturity (as defined in the Credit Agreement).

CREDIT RATING RATIONALE/DESCRIPTION
The Loans are collateralized primary by a portfolio of U.S. middle-market corporate loans. BTC Offshore Holdings Fund III-B LLC is managed by Blue Torch Offshore Credit Opportunities Fund III LP (an affiliate of Blue Torch Capital). Morningstar DBRS considers Blue Torch Capital to be an acceptable collateralized loan obligation (CLO) manager.

The Reinvestment Period is scheduled to end on January 30, 2027. The Final Maturity Date is June 28, 2033.

The assigned credit ratings reflect the following primary considerations:

(1) The Credit Agreement, dated as of June 28, 2024.
(2) The integrity of the transaction structure.
(3) Morningstar DBRS’ assessment of the portfolio quality.
(4) Adequate credit enhancement to withstand projected collateral loss rates under various cash flow stress scenarios.
(5) Morningstar DBRS’ assessment of Blue Torch Capital’s origination, servicing, and CLO management capabilities.

The transaction has a dynamic structural configuration that permits variations of certain asset metrics via a selection of an applicable row from a collateral quality matrix (the CQM). Depending on a given Diversity Score (DScore), the following metrics are selected accordingly from the applicable row of the CQM: Overcollateralization (OC) Ratio Test, Advance Rate Test, and Maximum Morningstar DBRS Risk Score Test. Morningstar DBRS analyzed each structural configuration as a unique transaction and all configurations passed the applicable Morningstar DBRS credit rating stress levels. The Coverage Tests and triggers as well as the Collateral Quality Tests that Morningstar DBRS modeled during its analysis are presented below.

Advance Rate Test: Subject to CQM; 57.50%
OC Ratio Test: Subject to CQM; 158.60%
Minimum DScore: Subject to CQM; 10.00
Minimum Morningstar DBRS Weighted-Average Recovery Rate: 47.50%
Maximum Morningstar DBRS Risk Score: Subject to CQM; 54.00%
Minimum Weighted-Average Spread: 6.50%
Minimum Weighted-Average Coupon: 8.00%

Some particular strengths of the transaction are (1) collateral that consists of primarily U.S. senior-secured middle-market corporate loans and (2) the adequate diversification of the portfolio of collateral obligations. Some challenges were identified: (1) 15% of the portfolio holdings may consist of First-Lien Last Out or Second-Lien Loans, and (2) the underlying collateral portfolio may be insufficient to redeem the Loans in an Event of Default.

Morningstar DBRS modeled the transaction using the Morningstar DBRS CLO Insight Model and its proprietary cash flow engine, which incorporated assumptions regarding principal amortization, principal prepayment, amount of interest generated, default timings, and recovery rates, among other credit considerations referenced in Morningstar DBRS’ “Global Methodology for Rating CLOs and Corporate CDOs.” Model-based analysis produced satisfactory results, which supported the provisional credit ratings on the Loans.

To assess portfolio credit quality, Morningstar DBRS provides a credit estimate or internal assessment for each nonfinancial corporate obligor in the portfolio not rated by Morningstar DBRS. Credit estimates are not ratings; rather, they represent a model-driven default probability for each obligor that Morningstar DBRS uses when rating the Loans.

Morningstar DBRS’ credit ratings on the Loans address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the interest (excluding the Excess Interest Amounts and the additional 2% interest payable at the Post-Default Rate, as defined in the Credit Agreement) and principal due on the Loans.

Morningstar DBRS’ credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations. For example, the credit ratings on the Loans do not address the Excess Interest Amounts, any Increased Costs, and the 2% interest payable at the Post-Default Rate (as defined in the Credit Agreement).

Morningstar DBRS’ long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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 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 (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

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

The principal methodology applicable to the credit ratings is Global Methodology for Rating CLOs and Corporate CDOs and the CLO Insight Model version 1.0.1.0 (February 23, 2024), https://dbrs.morningstar.com/research/428544.

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.

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 credit rating action.

This is a solicited credit rating.

A provisional credit rating is not a final credit rating with respect to the above-mentioned Loans and may change or be different than the final credit rating assigned or may be discontinued. The assignment of the final credit ratings on the above-mentioned Loans are 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.

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The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

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

-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623

-- Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.