Morningstar DBRS Confirms Provisional Credit Ratings on the Loans of BTC Holdings Fund III-B LLC

DBRS, Inc. (Morningstar DBRS) confirmed the following provisional credit ratings to the Class A-D Loans, the Class A-R Loans, and the Class A-T Loans (together, the Loans) issued by BTC Holdings Fund III-B LLC, pursuant to the Credit Agreement, dated as of December 20, 2023, entered into by and among BTC Holdings Fund III-B LLC, as the Borrower, The Bank of Nova Scotia, as the Administrative Agent, Citibank, N.A. as the Collateral Agent, Alter Domus (US) LLC, as the Collateral Administrator and Collateral Custodian, and the Lenders party thereto:

-- Class A-D Loans at (P) AA (sf)
-- Class A-R Loans at (P) AA (sf)
-- Class A-T Loans at (P) 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 the ultimate payment of principal on or before the Stated Maturity (as defined in the Credit Agreement).

CREDIT RATING RATIONALE/DESCRIPTION
The credit rating actions are a result of Morningstar DBRS' annual review of the transaction performance by applying the "Global Methodology for Rating CLOs and Corporate CDOs" (the CLO Methodology; November 19, 2024; https://dbrs.morningstar.com/research/443207). The Reinvestment Period end date is October 20, 2026. The Stated Maturity Date is December 20, 2032.

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

Morningstar DBRS 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 October 4, 2024, the Borrower is in compliance with all performance metrics that are in effect. The current transaction performance is within Morningstar DBRS' expectation, which supports the confirmation of credit ratings on the Loans, as per the Level I surveillance analysis in the CLO Methodology. No predictive model is utilized in the Level I surveillance process.

Some of the performance metrics that Morningstar DBRS reviewed are listed below:

Coverage Tests
Overcollateralization Ratio: minimum 158.60%; currently 223.55%
Interest Coverage Ratio: minimum135.00%; currently 326.66%
Advance Rate: maximum 57.50%; currently 44.73%

Collateral Quality Tests
Minimum Weighted-Average Spread: minimum 6.50%; currently 7.38%
Minimum Weighted-Average Recovery Rate: minimum 47.5%; currently 54.0%
Maximum Weighted-Average Risk Score: maximum 40.10%; currently 36.14%
Minimum Diversity Score: minimum 20.00; currently 20.85

The transaction is performing according to the contractual requirements of the Credit Agreement. As of October 4, 2024, there were no defaults registered in the portfolio.

The credit ratings also reflect the following primary considerations:

(1) The Credit Agreement, dated as of December 20, 2023.
(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 the origination, servicing, and CLO management capabilities of Blue Torch Capital.

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) 10% 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.

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 DBRS Morningstar uses when rating the Loans.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

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 Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

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 (November 19, 2024) https://dbrs.morningstar.com/research/443207.

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 final credit ratings on the above-mentioned Loans 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.

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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.

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

Operational Risk Assessment for Collateralized Loan Obligations (CLOs) and Corporate Collateralized Debt Obligations (CDOs) (August 23, 2024) https://dbrs.morningstar.com/research/438315

Legal Criteria for U.S. Structured Finance (October 28, 2024) https://dbrs.morningstar.com/research/441840  

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