DBRS Morningstar Assigns New Rating to Horizon Funding Trust 2019-1

DBRS, Inc. (DBRS Morningstar) assigned a new A (high) (sf) rating to the notes issued by Horizon Funding Trust 2019-1.

The notes are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding rating of these notes Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding rating; such withdrawal will occur on July 2, 2020. In accordance with MCR’s engagement letter covering the notes, upon withdrawal of MCR’s outstanding rating, the DBRS Morningstar rating will become the successor rating to the withdrawn MCR rating. Information about the MCR rating, including the history of the MCR rating, can be found at www.morningstarcreditratings.com.

As stated in its June 16, 2020, press release, “DBRS and Morningstar Credit Ratings Confirm U.S. Venture Debt Asset Class Coverage,” DBRS Morningstar applied MCR’s “U.S. ABS General Ratings Methodology” in conjunction with DBRS’ analytical tools (DBRS CLO Asset Model), cash flow engines for collateralized loan obligations, and the November 11, 2019, analytical integration approval of the “Rating CLOs and CDOs of Large Corporate Credit” methodology to assign the aforementioned new rating.

DBRS Morningstar’s rating is based on the following analytical considerations:

(1) DBRS Morningstar reviewed the rating analysis MCR performed on the transaction on or prior to the closing date. The analysis considered the legal structure of the transaction, the credit quality of the collateral, and the operational capabilities of the sponsor.

(2) DBRS Morningstar notes that MCR performed a legal analysis, including, but not limited to, legal opinions and various transaction documents, and engaged external counsel as part of its process of assigning a new rating to the transaction on or prior to the closing date. For the purpose of assigning a new rating to the transaction, DBRS Morningstar did not perform additional legal analysis unless otherwise indicated in this press release.

(3) DBRS Morningstar performed a high-level operational risk assessment by reviewing data and information MCR received. MCR also performed an operational risk assessment when assigning the rating to this transaction on or prior to the closing date.

(4) DBRS Morningstar reviewed key transaction performance indicators reported in periodic remittance reports since the transaction’s closing date.

COLLATERAL
This transaction is secured by venture debt loans. Venture debt is generally represented by either first- or second-line loans to development stage companies backed by established venture capital and private equity firms in industries such as information technology, life science, healthcare and healthcare data, and clean technology. The transaction has a two-year reinvestment period from its closing date of August 13, 2019. The transaction contains eligibility criteria regarding the loans that can be in the pool, including limitations on the original loan-to-value ratio.

CASH FLOW ANALYSIS
The key assumptions in the cash flow analysis include the credit quality, diversity of the collateral pool, and anticipated recovery rates. The breakeven cumulative gross default rate is compared with the cumulative gross default rate hurdle for a given rating category. If the breakeven cumulative gross default rate is greater than the cumulative gross default rate hurdle, then the cash flows for the transaction have passed for the rating category tested.

STRESS SCENARIOS
DBRS Morningstar considered six stress scenarios derived for the initial rating, which included varying assumptions regarding the advance rate, repayment speed, credit risk score, and diversity. DBRS Morningstar’s review included additional testing, using its predictive model (DBRS CLO Asset Model) and cash flow engine in conjunction with the original MCR assumptions, such as base conditional default rate, assumed collateral repayment rate and the recovery rate.

ESG CONSIDERATIONS
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 methodologies are MCR’s U.S. ABS General Ratings Methodology (December 12, 2018) and DBRS Morningstar’s 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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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.

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

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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