DBRS Morningstar Assigns Ratings to Loans and Notes of Churchill MMSL III Levered Investment, LP

DBRS, Inc. (DBRS Morningstar) assigned the following ratings to the Class A-R Loans, the Class A-T Loans, the Class B Loans, the Class B Notes, the Class C Loans, and the Class C Notes (collectively, the Loans and the Secured Notes) issued by Churchill MMSL III Levered Investment, LP:

-- Class A-R Loans rated AA (sf)
-- Class A-T Loans rated AA (sf)
-- Class B Loans rated A (sf)
-- Class B Notes rated A (sf)
-- Class C Loans rated BBB (sf)
-- Class C Notes rated BBB (sf)

The ratings on the Class A-R Loans and the Class A-T Loans (together, the Class A Loans), the Class B Loans and the Class C Loans (collectively, with the Class A Loans, the Loans) are being assigned pursuant to the Credit Agreement dated as of December 4, 2020, among Churchill MMSL III Levered Investment, LP as Borrower; Natixis, New York Branch (Natixis) as Administrative Agent; Churchill MMSL III Levered GP Ltd. as General Partner; U.S. Bank National Association as Collateral Agent, Collateral Administrator, Information Agent, Custodian, and Document Custodian; and the Lenders referred to therein.

The ratings on the Class B Notes and the Class C Notes (together, the Notes or the Secured Notes) are being assigned pursuant to the Note Purchase Agreement dated as of December 4, 2020, among Churchill MMSL III Levered Investment, LP as Issuer; Natixis, New York Branch (Natixis) as Administrative Agent; U.S. Bank National Association as Collateral Agent and Note Agent; and the Purchasers referred to therein.

The ratings on the Class A Loans address the timely payment of interest (excluding any Capped Amounts and the additional 2% of interest payable at the Post-Default Rate, 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 referred to above).

The ratings on the Class B Loans and Class B Notes (together, the Class B Debt) and on the Class C Loans and Class C Notes (together, the Class C Debt) address the ultimate payment of interest (excluding the additional 2% of interest payable at the Post-Default Rate, as defined in the Credit Agreement and the Note Purchase Agreement referred to above) and the ultimate payment of principal on or before the Stated Maturity (as defined in the Credit Agreement and the Note Purchase Agreement referred to above).

The Loans and Secured Notes issued by Churchill MMSL III Levered Investment, LP will be collateralized primarily by a portfolio of U.S. middle-market corporate loans. Churchill MMSL III Levered Investment, LP will be managed by Nuveen Alternative Advisors LLC. Additionally, Churchill Asset Management LLC will act as Sub-Advisor for this transaction. DBRS Morningstar considers the Collateral Manager and the Sub-Advisor to be acceptable with respect to their duties as they relate to collateralized loan obligation (CLO) management.

The above ratings reflect the following primary considerations:

(1) The Credit Agreement dated as of December 4, 2020.

(2) The Note Purchase Agreement dated as of December 4, 2020.

(3) The integrity of the transaction structure.

(4) DBRS Morningstar’s assessment of the portfolio quality.

(5) Adequate credit enhancement to withstand projected collateral loss rates under various cash flow stress scenarios.

(6) DBRS Morningstar’s assessment of the origination, servicing, and collateralized loan obligation management capabilities of Nuveen Alternative Advisors LLC and Churchill Asset Management LLC.

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 ratings to a facility.

As the Coronavirus Disease (COVID-19) spreads around the world, certain countries imposed quarantines and lockdowns, including the U.S., which accounts for over one-quarter of confirmed cases worldwide. The coronavirus pandemic has negatively 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 U.S. 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: December Update” commentary on December 2, 2020, DBRS Morningstar further considers additional adjustments to assumptions for the CLO asset class in the moderate economic scenario outlined in the commentaries. 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 obligors at various rating levels based on their perceived exposure to the adverse disruptions caused by the coronavirus pandemic. 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, 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. DBRS Morningstar then performed a cash flow model analysis to determine the breakeven default rate for the Loans and Notes. 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 the Loans and Notes in order to achieve the rating. The results of this stress indicate that the Loans and Notes can withstand an additional higher default adjustment, at their respective rating levels, 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” 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; its July 22, 2020, updated commentary, “Global Macroeconomic Scenarios: July Update” at https://www.dbrsmorningstar.com/research/364318; its September 10, 2020, updated commentary “DBRS Morningstar: Global Macroeconomic Scenarios: September Update” at https://www.dbrsmorningstar.com/research/366543; and its December 2, 2020, updated commentary “DBRS Morningstar: Global Macroeconomic Scenarios: December Update” at https://www.dbrsmorningstar.com/research/370672.

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 (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.

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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