Morningstar DBRS Confirms Credit Rating on Class A-T Loans and Discontinues Credit Ratings on the Class A-T-1 and Class A-R Loans Issued by BTC Holdings Fund II LLC

DBRS, Inc. (Morningstar DBRS) confirmed its credit rating of AA (sf) on the Class A-T Loans issued by BTC Holdings Fund II LLC. At the same time, Morningstar DBRS discontinued its credit ratings for repayment on the Class A-T-1 Loans and the Class A-R Loans (together with the Class A-T Loans, the Class A Loans).

The Class A Loans were issued pursuant to the Credit Agreement dated as of July 1, 2021, as amended by the First Amendment to the Credit Agreement dated September 1, 2021, and the Omnibus Amendment dated April 5, 2022 (the Credit Agreement); as further amended by the Third Amendment to the Credit Agreement dated May 27, 2022; the Fourth Amendment to the Credit Agreement, dated June 5, 2023, and further restated on April 11, 2024 (the Restated Credit Agreement) entered into by and among BTC Holdings Fund II LLC as the Borrower; Natixis, New York Branch, as Administrative Agent; Citibank, N.A. (rated AA (low) with a Stable trend by Morningstar DBRS) as Collateral Agent; Alter Domus (US) LLC as Collateral Administrator and Collateral Custodian; and the Lenders party thereto.

The credit rating on the Class A-T Loans addresses the timely payment of interest (excluding any Excess Interest Amounts, as defined in the Restated Credit Agreement) and the ultimate payment of principal on or before the Stated Maturity (as defined in the Credit Agreement).

The discontinuation of the Class A-T-1 Loans and the Class A-R Loans reflects the full payment of interest and the full repayment of principal due on each of the loans.

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

RATING RATIONALE
The rating actions on the Class A-T Loans are the result of Morningstar DBRS’ review of the Restated Credit Agreement, including a decrease of the Applicable Margin on the Class A-T Loans, a decrease of the Total Class A-T Commitment, and updates of the Overcollateralization Ratio Test, Interest Coverage Ratio Test, and Weighted Average Life Test, among other changes.

The transaction’s Stated Maturity is April 11, 2030. The Reinvestment Period ended on July 15, 2023.

In its analysis, Morningstar DBRS considered the following aspects of the transaction:
(1) The transaction’s capital structure and the form and sufficiency of available credit enhancement.
(2) Relevant credit enhancement in the form of subordination and excess spread.
(3) The ability of the Class A-T Loans to withstand projected collateral loss rates under various cash flow stress scenarios.
(4) The credit quality of the underlying collateral and the ability of the transaction to reinvest Principal Proceeds into new Collateral Obligations, subject to the Eligibility Criteria, which include testing the Concentration Limitations, Collateral Quality Tests, and Coverage Tests.
(5) Morningstar DBRS’ assessment of the origination, servicing, and CLO management capabilities of Blue Torch Capital as the Collateral Manager.

This portfolio is static in nature and allows limited reinvestment. To account for a static pool, Morningstar DBRS analyzed the actual obligations in the pool as reported in the trustee report as of February 29, 2024. The Coverage Tests and Collateral Quality Tests that Morningstar DBRS modeled in its analysis are presented below.

Coverage Tests
Overcollateralization (OC) Ratio: Threshold 165.00%; Current 212.84%
Interest Coverage (IC) Ratio: Threshold 150.00%; Current % 447.01%

Collateral Quality Tests
Minimum Diversity Score Test: Subject to Collateral Quality Matrix; Threshold 20.00; Current 21.33
Maximum Morningstar DBRS Risk Score Test: Subject to Collateral Quality Matrix; Threshold 40.10%; Current 38.07%
Minimum Weighted-Average Morningstar DBRS Recovery Rate Test: Threshold 47.50%; Current 51.90%
Minimum Weighted-Average Spread (WAS) Test: Threshold 6.50%; Current 8.08%

Some particular strengths of the transaction are (1) collateral quality that consists of primarily U.S. middle-market corporate loans and (2) the adequate diversification of the portfolio of collateral obligations. Some challenges were identified: (1) 9% of the portfolio holdings are First Lien Last Out or Second-Lien Loans, and (2) the underlying collateral portfolio may be insufficient to redeem the Class A-T Loans in an Event of Default.

As of February 29, 2024, the Borrower is in compliance with all Coverage and Collateral Quality Tests. The Borrower is failing its Concentration Limitations for Sixth Largest Obligor, Largest Morningstar DBRS Industry, and Second-Largest Morningstar DBRS Industry.

Given a static pool, Morningstar DBRS analyzed the actual obligations in the pool as opposed to a hypothetical pool, which is governed by the covenanted test limitations, taking into consideration the concentration limitation failures. Morningstar DBRS analyzed each loan in the pool separately by inputting its rating, seniority, country of origin, and industry among a few into the Morningstar DBRS CLO Insight Model.

Morningstar DBRS analyzed 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, principal prepayments, default timings, and recovery rates, among other credit considerations referenced in Morningstar DBRS’ “Global Methodology for Rating CLOs and Corporate CDOs” (February 24, 2024; https://dbrs.morningstar.com/research/428544).

Model-based analysis, which had incorporated the above-mentioned Concentration Limitation breaches, produced satisfactory results. Considering the transaction performance, as well as its legal aspects and structure, Morningstar DBRS confirmed its credit rating on the Class A-T Loans.

The transaction assumptions consider Morningstar DBRS’ baseline macroeconomic scenarios for rated sovereign economies, available in its commentary “Baseline Macroeconomic Scenarios for Rated Sovereigns: March 2024 Update,” published on March 27, 2024 (https://dbrs.morningstar.com/research/430189). These baseline macroeconomic scenarios replace Morningstar DBRS’ moderate and adverse pandemic scenarios, which were first published in April 2020.

For more information regarding Morningstar DBRS’ additional adjustment for select industries related to COVID-19, please see its May 18, 2020, commentary, “CLO Risk Exposure to the Coronavirus Disease (COVID-19)” at https://dbrs.morningstar.com/research/361112.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a relevant or significant 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 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 v1.0.1.0 (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.

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

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed credit ratings:

The last credit rating action on this issuer took place on November 17, 2023, when Morningstar DBRS confirmed the credit ratings and removed the Under Review with Developing Implications status from the Class A Loans.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Oxana Rhybak, Vice President, Structured Credit
Rating Committee Chair: Jerry van Koolbergen, Managing Director, Structured Credit
Initial Rating Date: July 02, 2021

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 CLOs and CDOs (September 14, 2023)
https://dbrs.morningstar.com/research/420608

Legal Criteria for U.S. Structured Finance (December 07, 2023)
https://dbrs.morningstar.com/research/425081

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

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