Morningstar DBRS Assigns Credit Rating to NPC III RN (Canada) LP

DBRS, Inc. (Morningstar DBRS) assigned a credit rating to the Class A Senior Secured Revolving Deferrable Floating Rate Notes (the Rated Notes) to be issued by NPC III RN (Canada) LP (the Feeder Fund) at BBB (low) with a Stable trend. This credit rating addresses the ultimate payment of interest and the ultimate payment of principal on or before maturity.

KEY CREDIT RATING CONSIDERATIONS
Northleaf Private Credit III LP (NPC III or the Main Fund) is a fund that invests across middle market corporate debt and specialty finance investments. The Feeder Fund invests in NPC III and its assets consist of limited partner (LP) interests in the Main Fund. NPC III is currently investing and has approximately 15 investments across 10 unique borrowers as of Q4 2024. Ultimately, the Main Fund is expected to ramp to diversified portfolio of investments across approximately 30 unique obligors.

NPC III's strategy is to invest across the capital structure with the intent to invest in approximately 50% to 80% senior secured loans, 20% to 40% second-lien and mezzanine loans, and up to 20% structured capital and equity co-investments. NPC III is not expected to use any leverage at the Main Fund outside of a capital call line. NPC III's three-year investment period will end in August 2027 followed by a four-year amortization period with certain extension options.

The Feeder Fund is expected to maintain a consistent leverage ratio of 54% Rated Notes and 46% par subordination, which is in the form of unrated subordinated debt and equity (the Leverage Ratio). It is expected that the Feeder Fund will apply cash flows received in connection with its LP interests in NPC III so as to maintain the Leverage Ratio on the Rated Notes. At the end of the reinvestment period, proceeds will be used to pay principal and interest on the Rated Notes, prior to any distributions to the subordinated debt and equity.

CREDIT RATING RATIONALE
The BBB (low) credit rating on the Rated Notes is supported by the Feeder Fund's LP interests in the Main Fund, which is considered a strategic investment vehicle of Northleaf Capital Partners (Northleaf Capital). NPC III is the third fund in a series, where the first two funds have demonstrated a strong investment and performance track record. Given Northleaf Capital's demonstrated track record of underwriting and risk management, Morningstar DBRS has made certain assumptions around the expected asset composition and credit quality of the Main Fund's investment portfolio as it ramps to a diversified portfolio.

Morningstar DBRS has constructed an expected investment portfolio based upon Northleaf Capital's historical track record in the fund series and expectations for NPC III. 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 portfolio-level probability of default. These characteristics include the credit quality, maturity, obligor, industry diversity and domicile of each debt investment. Additionally, Morningstar DBRS has privately assessed the credit quality of a sample pool of debt investments from NPC I and NPC II, and also assessed a majority of the debt investments that have been made into NPC III. These assessments were used to determine the credit quality of the investment portfolio, which averaged at B (low). Recovery assumptions are derived based on expected portfolio composition by seniority, investment type, and jurisdiction. Collateral outside the scope of Morningstar DBRS' analysis receives no collateral credit. These expected portfolio characteristics are aggregated to determine the Fund's Asset Coverage Ratio (ACR) ranges for a given credit rating level.

The investments within the Main Fund, which support net cash proceeds to the Feeder Fund, are also expected to benefit from the larger Northleaf Capital platform. Northleaf Capital has demonstrated a good historical track record in the private credit sector, supported by robust underwriting and risk management processes. Northleaf Capital is owned by certain Power Corp. entities, which have Morningstar DBRS public credit ratings including Great-West LifeCo Inc. (rated A (high)) and IGM Financial Inc. (rated A (high)). These Power Corp. entities have a 49.9% ownership stake in Northleaf Capital and a 70% economic interest. Furthermore, Morningstar DBRS has privately assessed Northleaf Capital as a strong fund manager.

NPC III is not expected to use fund-level leverage outside of a capital call facility. This capital call facility is expected to serve as a liquidity facility only and will be paid down as LPs meet capital calls. The usage of the facility is not expected to exceed committed capital to NPC III.

Morningstar DBRS' analysis, which incorporates aforementioned factors, implies a credit rating of BBB for the Rated Notes. This credit rating level incorporates a strong fund manager assessment, anticipated and actual fund compositions, an assessment of credit quality on existing and anticipated investments, and quantitative modeling. This results in a minimum ACR of 186% or a maximum advance rate of 54%. The BBB (low) credit rating on the Rated Notes is one notch lower than the BBB implied credit rating because of the effective subordination of the Rated Notes' claim on Main Fund assets and the senior position of the capital call facility.

CREDIT RATING DRIVERS
Morningstar DBRS could upgrade the credit ratings if the composition of the Main Fund were to (1) be of a higher credit quality than anticipated, and/or (2) include a higher percentage of senior secured first-lien loans and fewer subordinated loans or equity investments.

Morningstar DBRS could downgrade the credit rating if the asset analysis assessment is weaker than anticipated which could be driven by: (1) weaker-than-expected credit and/or recovery risk of individual investments, (2) lesser diversity of portfolio investments than planned, and/or (3) a persistently lower ACR than anticipated without a credible plan to remediate. Additionally, Morningstar DBRS could downgrade the investment-grade note credit rating if fixed charge coverage were maintained at less than 1.5 times for an extended period without a credible plan for remediation.

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 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 is the Global Methodology for Rating Debt Issued by Investment Funds (October 14, 2024; https://dbrs.morningstar.com/research/441191). In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024; https://dbrs.morningstar.com/research/437781) in its consideration of ESG factors.

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

The primary sources of information used for this credit rating include Morningstar, Inc. and company documents.

Morningstar DBRS considers the information available to it for the purposes of providing this credit rating was of satisfactory quality.

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS's trends and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com.

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