DBRS Morningstar Confirms and Places Ratings on Loans Issued by Brightwood Fund III Static 2018-1 LLC Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) confirmed the AAA (sf) rating on the Class A Loans issued by Brightwood Fund III Static 2018-1, LLC (the Borrower) up to the Total Class A Commitment of $404,200,000 (the Class A Loans). DBRS Morningstar also placed the Borrower’s AA (low) (sf) rating on the Class B Loans up to the Total Class B Commitment of $40,000,000 (the Class B Loans) and the A (sf) rating on the Class C Loans up to the Total Class C Commitment of $12,700,000 (the Class C Loans; together with the Class A Loans and the Class B Loans, the Loans) Under Review with Negative Implications.

The ratings on the Loans were assigned pursuant to the Credit Agreement dated as of July 16, 2018, among Brightwood Fund III Static 2018-1, LLC as Borrower; U.S. Bank National Association as Administrative Agent, Collateral Agent, and Custodian; and the Lenders referred to therein.

The Loans are collateralized primarily by a portfolio of U.S. middle-market corporate loans. This portfolio is static in nature and does not allow for reinvestment.

The rating on the Class A Loans addresses the timely payment of interest (excluding any Excess Interest Amounts, as defined in the Credit Agreement referred to above) and the ultimate payment of principal on or before the Stated Maturity (as defined in the Credit Agreement). The ratings on the Class B Loans and the Class C Loans address the ultimate payment of interest (excluding the respecting Class B Deferred Interest, Class C Deferred Interest, and any Excess Interest Amounts, as defined in the Credit Agreement) and the ultimate payment of principal on or before the Stated Maturity (as defined in the Credit Agreement).

DBRS Morningstar took these rating actions as a result of the recent deterioration in the underlying portfolio’s credit quality. In the last few months, DBRS Morningstar observed that the portfolio’s weighted-average (WA) risk score has increased materially. DBRS Morningstar deems these actions appropriate amid the uncertainty of the Coronavirus Disease (COVID-19) pandemic and its continued impact on the underlying portfolio’s credit quality and performance.

To assess portfolio credit quality, DBRS Morningstar provides a credit estimate or internal assessment for each non-financial 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.

Under the Credit Agreement, upon the occurrence and during the continuance of an Event of Default, the Administrative Agent may be directed by a Majority of the Controlling Class (as defined in the Credit Agreement referred to above) to sell or otherwise dispose of the Collateral as a remedy, which could disadvantage the Class B Loans and Class C Loans. Thus, the ratings assigned on the Class B Loans and Class C Loans are subject to additional downgrade risk and/or default for nonpayment.

Additionally, under the Credit Agreement, upon the occurrence and during the continuance of an Event of Default, 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, in which amounts due to the Loans will include additional Excess Interest Amounts and Increased Costs (as defined in the Credit Agreement referred to above). Thus, the ratings assigned to the Class A Loans, Class B Loans, and Class C Loans are subject to downgrades as a result of these additional Excess Interest Amounts in the event of any Event of Default and movement to Section 6.4.

As the coronavirus spread around the world, certain countries imposed quarantines and lockdowns, including the United States, which accounts for over one-quarter of confirmed coronavirus cases worldwide. The coronavirus pandemic has adversely affected not only the economies of the nations most afflicted with the coronavirus, but also the overall global economy with diminished demand for goods and services as well as disrupted supply chains. This may result in deteriorated financial conditions for many companies and obligors, some of which will experience the effects of such negative economic trends more than others. At the same time, governments and central banks in multiple regions, including the United States and Europe, have taken significant measures to mitigate the economic fallout from the coronavirus pandemic.

In conjunction with DBRS Morningstar’s commentary “Global Macroeconomic Scenarios: Implications for Credit Ratings” published on April 16, 2020, and updated in its “Global Macroeconomic Scenarios: June Update” commentary on June 1, 2020, DBRS Morningstar further considers additional adjustments to assumptions for the collateralized loan obligation (CLO) asset class that consider the moderate economic scenario outlined in the commentaries. The adjustments include a higher default assumption for the WA credit quality of the current collateral obligation portfolio. To derive the higher default assumption, DBRS Morningstar notches ratings for obligors in certain industries and obligors at various rating levels based on their perceived exposure to the adverse disruptions caused by the coronavirus. Considering a higher default assumption would result in losses that exceed the original default expectations for the affected classes of notes, DBRS Morningstar may adjust the default expectations further if the duration or severity of the adverse disruptions caused by the coronavirus change.

DBRS Morningstar ran an additional higher default adjustment 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 DBRS Morningstar’s CLO Asset Model to generate a stressed default rate. DBRS Morningstar considered the results of this additional default adjustment for the above rating actions.

For more information regarding DBRS Morningstar’s simplified set of macroeconomic scenarios for select economies related to the coronavirus, please see its April 16, 2020, commentary “Global Macroeconomic Scenarios: Implications for Credit Ratings” at https://www.dbrsmorningstar.com/research/359679; its April 22, 2020, commentary “Global Macroeconomic Scenarios: Application to Credit Ratings” at https://www.dbrsmorningstar.com/research/359903; and its June 1, 2020, updated commentary, “Global Macroeconomic Scenarios: June Update” at https://www.dbrsmorningstar.com/research/361867.

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

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.

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

This rating is endorsed by DBRS Ratings Limited (DBRS Morningstar) for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

The last rating action on this transaction took place on July 18, 2019.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Lead Analyst: Quan Yoon, Assistant Vice President
Rating Committee Chair: Jerry van Koolbergen, Managing Director
Initial Rating Date: July 18, 2018

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

DBRS, Inc.
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New York, NY 10005 USA
Tel. +1 212 806-3277

-- Rating CLOs and CDOs of Large Corporate Credit and CLO Asset Model Version 2.2.3 (February 28, 2020)
https://www.dbrsmorningstar.com/research/357452/rating-clos-and-cdos-of-large-corporate-credit.

-- Cash Flow Assumptions for Corporate Credit Securitizations (February 28, 2020)
https://www.dbrsmorningstar.com/research/357453/cash-flow-assumptions-for-corporate-credit-securitizations

-- Legal Criteria for U.S. Structured Finance (January 21, 2020)
https://www.dbrsmorningstar.com/research/355719/legal-criteria-for-us-structured-finance