DBRS Morningstar Assigns Provisional Ratings to the Funded Class B-1 Loans and the Funded Class B-2 Loans of Battalion CLO 17 Ltd.

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings of BBB (low) (sf) to the Funded Class B-1 Loans and BB (low) (sf) to the Funded Class B-2 Loans (together, the Class B Loans) of Battalion CLO 17 Ltd., pursuant to the Revolving Loan Agreement, dated as of September 24, 2020, and amended pursuant to the First Amendment, dated as of November 3, 2020, by and among the following: Brigade Capital Management LP, as the Collateral Manager; Battalion CLO 17 Ltd., as the Borrower; the Lenders from time to time party thereto; Royal Bank of Canada, as the Administrative Agent; and Citibank, N.A., as the Collateral Custodian.

The provisional ratings on the Class B Loans address the ultimate payment of interest and the ultimate payment of principal on or before the Facility Maturity Date (as defined in the Revolving Loan Agreement referenced above).

The Class B Loans of Battalion CLO 17 Ltd. will be collateralized primarily by a portfolio of U.S. broadly syndicated corporate loans. Brigade Capital Management LP will be the Collateral Manager for this transaction.

The provisional ratings reflect the following primary considerations:

-- The First Amendment to the Revolving Loan Agreement, dated as of November 3, 2020
-- The integrity of the transaction structure.
-- DBRS Morningstar’s assessment of the portfolio quality.
-- Adequate credit enhancement to withstand DBRS Morningstar’s projected collateral loss rates under various cash flow-stress scenarios.
-- DBRS Morningstar’s assessment of the origination, servicing, and collateralized loan obligation (CLO) management capabilities of Brigade Capital Management LP.

As of the date of the provisional ratings, DBRS Morningstar performed a telephone operational risk review of Brigade Capital Management LP. DBRS Morningstar did not perform an on-site operational risk review at the company’s offices because of the current Coronavirus Disease (COVID-19) outbreak. DBRS Morningstar found Brigade Capital Management LP to be an acceptable collateral manager.

Provisional ratings are not final ratings with respect to the above-mentioned Class B Loans and may be different than the final ratings assigned or may be discontinued. The assignment of final ratings on the above-mentioned Class B Loans is subject DBRS Morningstar receiving all data and/or information and final documentation that is necessary to finalize the ratings for these instruments, including satisfaction of the DBRS Effective Date Condition (as defined in the Revolving Loan Agreement). If the Borrower fails to complete the above conditions, as described in the Revolving Loan Agreement, DBRS Morningstar may not finalize the provisional ratings or finalize them at different ratings than the original provisional ratings.

As the coronavirus spreads around the world, certain countries imposed quarantines and lockdowns, including the United States, which accounts for over one-fourth of confirmed cases worldwide. The coronavirus pandemic has negatively affected not only the economies of the countries with the highest infection rates, 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: September Update” on September 10, 2020, DBRS Morningstar further considers additional 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 current collateral obligation portfolio. To derive the higher default assumption, DBRS Morningstar notches ratings for obligors in certain industries and for 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.

For CLOs with minimally ramped assets at closing, DBRS Morningstar considers whether the Revolving Loan Agreement contains a Collateral Quality Matrix with sufficient rows and columns that would allow for higher stressed DBRS Morningstar Risk Scores and, therefore, a higher default probability on the collateral pool, while still remaining in compliance with the other Collateral Quality Tests, such as WA Spread and Diversity Score. The results of this analysis indicate that the instrument can withstand an additional higher default probability commensurate with a moderate-scenario impact of the coronavirus.

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” (https://www.dbrsmorningstar.com/research/359679); its April 22, 2020, commentary, “Global Macroeconomic Scenarios: Application to Credit Ratings” (https://www.dbrsmorningstar.com/research/359903); its June 1, 2020, updated commentary, “Global Macroeconomic Scenarios: June Update” (https://www.dbrsmorningstar.com/research/361867); its July 22, 2020, updated commentary, “Global Macroeconomic Scenarios: July Update” (https://www.dbrsmorningstar.com/research/364318); and its September 10, 2020, updated commentary “Global Macroeconomic Scenarios: September Update” (https://www.dbrsmorningstar.com/research/366543).

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)” (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 (July 21, 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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