Morningstar DBRS Requests Comments on Proposed Updates to the Methodology for Rating Collateralized Fund Obligations backed by Private Capital

Morningstar DBRS is requesting comments on the proposed new Appendix III--U.S. Collateralized Fund Obligations Backed by Private Capital of the "Global Methodology for Rating Debt Issued by Investment Funds" (the RFC Methodology). Upon finalization after the close of the Request for Comment period, the RFC Methodology will supersede the "Rating U.S. Collateralized Fund Obligations Backed by Private Equity" methodology (the Current CFO Methodology) published on June 28, 2024, and the associated predictive model, DBRS Collateralized Fund Obligations Backed by Private Equity Model October 2021.

The RFC Methodology presents the principal asset class methodology that Morningstar DBRS intends to apply to assign new credit ratings and monitor outstanding credit ratings in the collateralized fund obligations (CFOs) backed by private capital asset class globally, following finalization of the methodology.

The RFC Methodology presents material changes from the Current CFO Methodology, including moving the criteria to an appendix of the "Global Methodology for Rating Debt Issued by Investment Funds" (the Fund Methodology). Proposed material changes include: (1) the introduction of a new analytical tool to sample historical fund J-curves (i.e., fund distributions net of capital calls over time) and (2) adjustments to sampled historical J-curves for qualitative factors such as seasoning of the underlying funds, portfolio diversity, leverage in underlying funds, and the quality of underlying fund managers.

The reasons for the aforementioned changes are updates to underlying fund performance data, including the addition of Pitchbook fund performance data.

Upon finalization of the RFC Methodology, Morningstar DBRS will apply the RFC Methodology to outstanding credit ratings in the CFOs backed by private capital asset class. Based on Morningstar DBRS' preliminary outstanding rating impact analysis, outstanding credit ratings are expected to be upgraded with a likely magnitude of one to two notches.

Comments should be received on or before October 3, 2024. Please submit your comments to the following email address: sfcomments@morningstar.com.

Morningstar DBRS publishes on its website all comments received, except in cases where confidentiality is requested by the respondent.

Notes:
Morningstar DBRS methodologies are publicly available on its website https://dbrs.morningstar.com under Methodologies & Criteria.

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