Morningstar DBRS Assigns Provisional Credit Ratings to NALP Business Loan Trust 2024-1

DBRS, Inc. (Morningstar DBRS) assigned provisional credit ratings to the following classes of notes to be issued by NALP Business Loan Trust 2024-1 (NALP 2024-1, or the Issuer):

-- $137,170,000 Class A Notes at A (sf)
-- $17,150,000 Class B Notes at BBB (high) (sf)

CREDIT RATING RATIONALE/DESCRIPTION
The provisional credit ratings are based on the review by Morningstar DBRS of the following analytical considerations:

-- The transaction assumptions consider Morningstar DBRS's baseline macroeconomic scenarios for rated sovereign economies, available in its commentary Baseline Macroeconomic Scenarios for Rated Sovereigns June 2024 Update, published on June 28, 2024. These baseline macroeconomic scenarios replace Morningstar DBRS's moderate and adverse Coronavirus Disease (COVID-19) pandemic scenarios, which were first published in April 2020.
-- The collateral pool loans were sourced, reviewed and underwritten relying on the same personnel and consistent with practices and on the terms utilized by Newtek for conforming SBA 7(a) loans.
-- For the Expected Final Pool, Morningstar DBRS's stressed cumulative net loss (CNL) hurdle rate of 38.41% in the cash flow scenarios is commensurate with a Class A Notes rating of A (sf) and the CNL hurdle rate of 31.48% is commensurate with the Class B Notes rating of BBB (high) (sf). For the Closing Pool, Morningstar DBRS's stressed CNL hurdle rate of 38.55% in the cash flow scenarios is commensurate with a Class A Notes rating of A (sf) and the CNL hurdle rate of 31.62% is commensurate with the Class B Notes rating of BBB (high) (sf). Morningstar DBRS did not assign any credit to seasoning of the Closing Pool collateral for the Series 2024-1 transaction of approximately 9 months as of the Cut-Off Date (the weighted average (WA) remaining term for the Closing Pool as of the same date was 236 months).
-- Morningstar DBRS's stressed CNL hurdle rate was derived using the custom probability of default (PD) curve which was input into the Morningstar DBRS CLO Insight Model. The WA expected cumulative gross default rate assumed by Morningstar DBRS as an input to the Morningstar DBRS CLO Insight Model for the Expected Final Pool was 29.45%, and the Closing Pool was 29.09%.
-- Morningstar DBRS used a stressed recovery rate of 33.11% in the cash flow scenarios commensurate with an A (sf) rating and 37.35% commensurate with a BBB (high) (sf) rating for the Expected Final Pool. For the Closing Pool, Morningstar DBRS used a stressed recovery rate of 33.30% in the cash flow scenarios commensurate with an A (sf) rating and 37.47% commensurate with a BBB (high) (sf) rating. The recovery rate assumption was derived primarily based on the value of first lien commercial real estate (CRE) and residential real estate (RRE) as well as machinery and equipment, as applicable. In some cases, limited recovery credit was given to the appraised value of land and to furniture and fixtures (FF&E), and other assets. No recovery credit was given to non-first lien assets pledged as collateral, including CRE and RRE properties.
-- Morningstar DBRS's cash flow analysis tested the ability of the transaction to generate cash flows sufficient to service the interest and principal payments on the Class A Notes and Class B Notes under two different default timing scenarios and with zero prepayment and 10% (of initial loan balance) prepayment in the beginning of Year 2 for both the Expected Final Pool and the Closing Pool.
-- Transaction's capital structure and form and sufficiency of available credit enhancement. The subordinated Ownership Certificates, cash held in the Reserve Account and Capitalized Interest Account, available excess spread and other structural provisions create credit enhancement levels that are commensurate with the rating for the Class A Notes and Class B Notes.
-- Subordination (in the form of unrated Ownership Certificates) as of the closing date will be equal to 19.00% of the aggregate collateral loan balance.
-- The replenishable, non-declining cash reserve account will be funded at 2.00% of the Initial Class Principal Amounts of the Class A Notes and Class B Notes.
-- The WA coupon for the collateral pool was approximately 12.46% as of the Initial Cut-Off Date for the Closing Pool. As the prefunding loans are already identified, the WA coupon is expected to increase to 12.68% following the end of prefunding period (excluding any interest rate resets). All of the loans are floating rate, with the interest rates resetting periodically on the respective Adjustment Date. On each Adjustment Date, the loan rate will be adjusted to equal the sum of the related index and a fixed percentage amount (the Gross Margin). As of the Cut-Off Date, the WA number of months until the next Adjustment Date was approximately 48, ranging from one to 60 months. In its stressed cash flow scenarios, Morningstar DBRS assumed the current loan rate for each loan until its respective Adjustment Date. After that, the loan rate for each loan was assumed to equal its Gross Margin.
-- The collateral for the transaction is represented by a discrete, amortizing pool of loans; however, the transaction includes a prefunding period, during which already identified business loans are expected to be added.
-- The prefunded loans are all floating rate and have a WA original term of 297 months. With the exception of two business loans, the obligors of the loans expected to be added during the prefunding period have been in business for at least 13 years. The prefunded business loans account for 16.14% of the current collateral balance for the Expected Final Pool.
-- The Closing Pool comprises 38 loans to 34 unique obligors. Four obligors are represented by two loans which are cross collateralized. For our analysis, the collateral for each such obligor was combined. Other collateral, including but not limited to, enterprise value, business valuation, and UCC on all assets account for 49.4% of the primary collateral type, with commercial real estate (CRE) accounting for approximately 43.8% of the primary collateral type (as classified by Newtek) as of the Initial Cut-Off Date. Other primary collateral types include accounts receivable and inventory (~3.4%), machinery and equipment (2.1%), and residential real estate (RRE) accounting for only approximately 1.3% of the primary collateral.
-- Loans representing approximately 65.2% of the Closing Pool have current LTV (as determined by Newtek and adjusted for prior liens) of less than or equal to 50%. Loans representing approximately 85.3% of the aggregate collateral loan balance have a current LTV of 70% or below.
-- Florida, New York, and California represented the three largest geographical concentrations of approximately 16.6%, 13.4%, and 11.0% of the aggregate collateral loan balance of the Closing Pool. The top three obligors in the Closing Pool accounted for approximately 26.7% of the total current collateral loan balance as of the Cut-Off Date, with the largest accounting for only ~9.4%. Approximately 39.0% of the aggregate current collateral loan balance of the Closing Pool was represented by the borrowers in the professional, scientific and technical services; accommodation; and food services and drinking places industries.
-- Morningstar DBRS completed an operational risk review of Newtek on May 12, 2024 and determined it to be an acceptable originator and servicer of small business loans. In addition, Newtek is an experienced sponsor of asset-backed securities (ABS) backed by non-guaranteed interests in SBA 7(a) small business loans, with 13 such transactions completed to date and five currently outstanding, in addition to their prior securitization of similar collateral that is rated by Morningstar DBRS. U.S. Bank National Association will act as the Back-up Servicer for the transaction.
-- The transaction is supported by an established structure and is consistent with Morningstar DBRS' Legal Criteria for U.S. Structured Finance methodology. Legal opinions covering true sale and non-consolidation will also be provided.

Morningstar DBRS' credit rating on the Class A Notes and the Class B Notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are listed at the end of this Press Release. The associated financial obligations are the related noteholders Current Interest, Carryforward Interest (excluding any amounts that constitute interest on unpaid interest), and Class Principal Amount on the Class A Notes and the Class B Notes.

Morningstar DBRS' credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. For example, the portion of Carryforward Interest attributable to interest on unpaid interest on the Class A Notes and the Class B Notes.

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 factor(s) 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) https://dbrs.morningstar.com/research/427030.

Notes:
All figures are in US Dollars unless otherwise noted.

The principal methodologies applicable to the credit ratings are Rating U.S. Structured Finance Transactions (Appendix XVIII: U.S. Small Business) (April 15, 2024) https://dbrs.morningstar.com/research/431204 and Global Methodology for Rating CLOs and Corporate CDOs (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 securities 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 securities 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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

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://dbrs.morningstar.com/about/methodologies.

Operational Risk Assessment for U.S. ABS Servicers (March 21, 2024),
https://dbrs.morningstar.com/research/430003/operational-risk-assessment-for-us-abs-servicers

Operational Risk Assessment for U.S. ABS Originators (March 21, 2024),
https://dbrs.morningstar.com/research/430004/operational-risk-assessment-for-us-abs-originators

Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024)
https://dbrs.morningstar.com/research/428623/interest-rate-stresses-for-us-structured-finance-transactions

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

Rating CLOs Backed by Loans to European SMEs (June 20, 2024),
https://dbrs.morningstar.com/research/434775/rating-clos-backed-by-loans-to-european-smes

CLO Insight Model v1.0.1.2
https://dbrs.morningstar.com/research/428544

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