DBRS Morningstar Confirms A (low) (sf) Rating on the Class A-R Loans Issued by Brightwood Capital Offshore Fund IV SPV-4, LLC

DBRS, Inc. (DBRS Morningstar) confirmed the rating of A (low) (sf) on the Class A-R Loans issued by Brightwood Capital Offshore Fund IV SPV-4, LLC up to the Total Class A-R Commitment of $128,000,000 pursuant to the Credit Agreement dated as of November 19, 2018 (as amended by the First Amendment to the Credit Agreement dated as of April 17, 2019; Second Amendment to the Credit Agreement dated as of September 11, 2019; Third Amendment to the Credit Agreement dated as of November 22, 2019; and Fourth Amendment to the Credit Agreement dated as of December 20, 2019), among Brightwood Capital Offshore Fund IV SPV-4, LLC, as Borrower; Capital One, National Association (rated “A” with a Stable trend by DBRS Morningstar), as Administrative Agent for the Lenders; U.S. Bank National Association (rated AA (high) with a Stable trend by DBRS Morningstar), as Collateral Agent and Custodian; and the Lenders referred to therein.

The Total Class A-R Commitment was increased to $128,000,000 from $108,000,000 pursuant to the execution of the Third Amendment to the Credit Agreement dated as of November 22, 2019.

The rating on the Class A-R Loans addresses the timely payment of interest (excluding any Excess Interest Amounts and interest attributable to the Increased Applicable Margin, each as defined in the amended Credit Agreement) and the ultimate payment of principal on or before the Stated Maturity (as defined in the amended Credit Agreement).

The Class A-R Loans are collateralized primarily by a portfolio of U.S. middle-market corporate loans and is managed by Brightwood SPV Advisors, LLC, which is 100% equity owned by Brightwood Capital Advisors, LLC. DBRS Morningstar considers Brightwood SPV Advisors, LLC to be an acceptable collateralized loan obligation (CLO) manager.

To assess portfolio credit quality, DBRS Morningstar provides a credit estimate or internal assessment for each nonfinancial corporate obligor in the portfolio not rated by DBRS Morningstar. Credit estimates are not ratings; rather, they represent a model-driven default probability for each obligor that is used in assigning a rating to the facility.

The rating reflects the following:

(1) The Credit Agreement dated as of November 19, 2018, as amended from time to time;
(2) The integrity of the transaction structure;
(3) DBRS Morningstar’s assessment of the portfolio quality;
(4) Adequate credit enhancement to withstand projected collateral loss rates under various cash flow stress scenarios;
(5) DBRS Morningstar’s assessment of the origination, servicing, and CLO management capabilities of Brightwood SPV Advisors, LLC and Brightwood Capital Advisors, LLC;
(6) DBRS Morningstar’s assessment as to how collateral performance could deteriorate due to macroeconomic stresses brought about by the Coronavirus Disease (COVID-19) pandemic; and
(7) Information about the extent of impact of the coronavirus on originations, underwriting, operations, and portfolio performance to date, which was shared with DBRS Morningstar by Brightwood SPV Advisors, LLC and Brightwood Capital Advisors, LLC.

Under the Credit Agreement, upon the occurrence and during the continuance of an event of default (EOD), the Collateral Agent may be directed by a Majority of the Controlling Class (as defined in the Credit Agreement) to sell or otherwise dispose of the Collateral as a remedy, which could disadvantage any junior classes of loans issued and subject the Class A-R Loans to additional downgrade risk and/or default risk. These EODs include a Class A Overcollateralization Ratio less than or equal to 125.0%.

Additionally, under the Credit Agreement, upon the occurrence and during the continuance of an EOD, the Administrative Agent or a Majority of the Controlling Class may declare the principal and interest on all amounts payable by the Borrower due and payable. Upon that declaration, all proceeds received by the Borrower will be applied in accordance with Section 6.4 of the Credit Agreement, in which amounts due to the Class A-R Loans will include additional Excess Interest Amounts and Increased Costs (as defined in the Credit Agreement). Thus the rating assigned to the Class A-R Loans could be subject to a downgrade as a result of any EOD and subsequent movement to Section 6.4.

The coronavirus broke out in China at the end of 2019 and has since spread to over 150 countries throughout the world, including the United States. This outbreak (and any future outbreaks) of the coronavirus has led (and may continue to lead) to significant adverse disruptions to the economies of the nations in which it has arisen, as well as the global economy in general. This may result in a deterioration in the financial condition of many companies and obligors, with some experiencing the impact of such negative economic trends more than others.

In conjunction with DBRS Morningstar’s commentary “Global Macroeconomic Scenarios: Implications for Credit Ratings” published on April 16, 2020, DBRS Morningstar applies adjustments to assumptions for the CLO asset class that consider the moderate economic scenario outlined in the commentary. The adjustments include a higher default assumption for the weighted-average (WA) credit quality of the collateral obligation’s current portfolio. To derive the higher default assumption, DBRS Morningstar notches ratings for obligors in certain industries and obligors by various rating levels based on their perceived exposure to the adverse disruptions of the coronavirus. Applying a higher default assumption would result in losses in excess of the original default expectations for the affected classes of notes. The default expectations may be adjusted further should the duration or severity of the adverse disruptions due to the coronavirus change.

In the moderate economic scenario, DBRS Morningstar currently expects that the coronavirus will begin to be contained within Q2 2020, resulting in a gradual relaxation of stay-at-home measures and nonessential business closures, allowing a gradual economic recovery to begin within Q3 2020. More information regarding DBRS Morningstar’s simplified set of macroeconomic scenarios for select economies related to the coronavirus pandemic can be found in its April 16, 2020, publication “Global Macroeconomic Scenarios: Implications for Credit Ratings” at https://www.dbrsmorningstar.com/research/359679.

For CLOs, DBRS Morningstar ran an additional higher default stress on the WA DBRS Morningstar Risk Score of the current collateral obligation pool, and this stressed modeling pool was run through the Monte Carlo simulation component of the DBRS Morningstar CLO Asset Model to generate a stressed default rate for each rating level. DBRS Morningstar then performed a cash flow model analysis to determine the breakeven default rate for each tranche where a rating was requested. The breakeven default rate is computed over nine combinations of default timing and interest rate stresses. The breakeven default rate must exceed the lifetime total default rate generated by the DBRS Morningstar CLO Asset Model for each tranche rating in order to achieve the rating. The results of this stress indicate that the rated loans can withstand an additional higher default stress commensurate with a moderate-scenario impact of the coronavirus.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is Rating CLOs and CDOs of Large Corporate Credit (February 28, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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