DBRS Morningstar Confirms Ratings on Class A Loans Issued by BTC Offshore Holdings Fund II-B LLC

DBRS, Inc. (DBRS Morningstar) confirmed the following ratings on the Class A-D Loans, the Class A-R Loans, and the Class A-T Loans (collectively, the Class A Loans) issued by BTC Offshore Holdings Fund II-B LLC, pursuant to the Credit Agreement dated as of October 20, 2021, among BTC Offshore Holdings Fund II-B LLC as the Borrower; the Lenders referred to therein; Natixis, New York Branch as the Administrative Agent; Sumitomo Mitsui Trust Bank (U.S.A.) Limited as Predecessor Collateral Agent; Citibank, N.A. as Successor Collateral Agent; and Alter Domus (US) LLC as the Collateral Administrator and Collateral Custodian:

-- Class A-D Loans at AA (sf)
-- Class A-R Loans at AA (sf)
-- Class A-T Loans at AA (sf)

The ratings on the Class A Loans address 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 referred to above).

The Class A Loans issued by BTC Offshore Holdings Fund II-B LLC are collateralized primarily by a portfolio of U.S. middle-market corporate loans. Blue Torch Offshore Credit Opportunities Master Fund II LP (Blue Torch Capital) will manage BTC Offshore Holdings Fund II-B LLC. DBRS Morningstar considers Blue Torch Capital an acceptable collateralized loan obligation (CLO) manager.

RATING RATIONALE
The rating actions are a result of the annual surveillance review of the transaction. DBRS Morningstar confirmed the ratings on the Class A Loans as the current transaction performance is within DBRS Morningstar’s expectation. The Stated Maturity of the Class A Loans is October 20, 2029. The Reinvestment Period ends on October 20, 2023.

In its analysis, DBRS Morningstar considered the following aspects of the transaction:

(1) The transaction’s capital structure and the form and sufficiency of available credit enhancement.
(2) Relevant credit enhancement in the form of subordination and excess spread.
(3) The ability of the Class A Loans to withstand projected collateral loss rates under various cash flow stress scenarios.
(4) The credit quality of the underlying collateral and the ability of the transaction to reinvest Principal Proceeds into new Collateral Obligations, subject to the Eligibility Criteria, which include testing the Concentration Limitations, Collateral Quality Tests, and Coverage Tests.
(5) DBRS Morningstar’s assessment of the origination, servicing, and CLO management capabilities of Blue Torch Capital.
(6) The legal structure as well as legal opinions addressing certain matters of the Borrower and the consistency with the DBRS Morningstar “Legal Criteria for U.S. Structured Finance” methodology.

The transaction has a dynamic structural configuration that permits variations of certain asset metrics via a selection of an applicable row from a collateral quality matrix (the CQM, as presented in Schedule F of the Credit Agreement). Depending on a given Diversity Score, the following metrics are selected accordingly from the applicable row of the CQM: DBRS Morningstar Risk Score, Advance Rate, and Overcollateralization (OC) Levels. DBRS Morningstar analyzed each structural configuration as a unique transaction and all configurations (rows) passed the applicable DBRS Morningstar rating stress levels. The Coverage Tests and triggers as well as the Collateral Quality Tests that DBRS Morningstar modeled during its analysis are presented below:

(1) OC Ratio: Subject to Collateral Quality Matrix; 158.60%
(2) Interest Coverage (IC) Ratio: 135.00%
(3) Maximum Weighted-Average Life Test: 5.5 years
(4) Maximum Diversity Score Test: Subject to Collateral Quality Matrix; 22
(5) Maximum DBRS Morningstar Risk Score Test: Subject to Collateral Quality Matrix; 40.90%
(6) Minimum Weighted-Average DBRS Morningstar Recovery Rate Test: 47.5%
(7) Minimum Weighted-Average Spread (WAS) Test: 6.5%
(8) Minimum Weighted-Average Fixed Rate Coupon Test: 8%

Some particular strengths of the transaction are (1) collateral quality that consists primarily of senior-secured floating-rate middle-market loans; (2) the adequacy of cash collected from the collateral to pay the interest (actual IC level of 412.39%, which exceeds the threshold of 135.00%); and (3) the Collateral Manager’s expertise in CLOs and overall approach to selection of Collateral Obligations. Some challenges were identified in a majority of the underlying loans having no public ratings and requiring either a credit estimate and/or a private rating from DBRS Morningstar.

The transaction is performing according to the contractual requirements of the Credit Agreement. As of August 31, 2022, the Borrower is in compliance with all Coverage and Collateral Quality Tests, as well as a majority of the Concentration Limitation tests. Although the portfolio collateral obligations had failing Largest Obligor and 6th Largest Obligor tests, the failures were accounted for in the DBRS Morningstar modeling process and no negative impacts to the transaction performance were presented. There was one defaulted obligation registered in the underlying portfolio as of August 31, 2022. The OC test would still pass with the defaulted obligation carried at zero value. Approximately 49% of the collateral are rated B (low), followed by around 20% at CCC (high).

DBRS Morningstar modeled the transaction using its proprietary cash flow engine and the DBRS Morningstar CLO Asset model. Model-based analysis produced satisfactory results that supported the ratings of AA (sf) on the Class A Loans.

Considering the transaction performance, its legal aspects, and the results produced by the models, DBRS Morningstar confirmed its ratings of AA (sf) on the Class A Loans issued by BTC Offshore Holdings Fund II-B 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 DBRS Morningstar uses when rating the loans.

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

The transaction assumptions consider DBRS Morningstar’s baseline macroeconomic scenarios for rated sovereign economies, available in its commentary “Baseline Macroeconomic Scenarios for Rated Sovereigns: September 2022 Update,” published on September 19, 2022. These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse pandemic scenarios, which were first published in April 2020.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at www.dbrsmorningstar.com/research/396929 (May 17, 2022).

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

The principal methodologies are Rating CLOs and CDOs of Large Corporate Credit (January 26, 2022) and Cash Flow Assumptions for Corporate Credit Securitizations (January 26, 2022), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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 for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings:

Each of the principal asset class methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, the “Rating CLOs and CDOs of Large Corporate Credit” (January 26, 2022) methodology provides a general overview of the entire rating process and details on asset analysis. The “Cash Flow Assumptions for Corporate Credit Securitizations” (January 26, 2022) methodology outlines the assumptions and analytical approach used in cash flow analysis.

This is the first rating action since the Initial Rating Date.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

Lead Analyst: Quan Yoon, Vice President, U.S. Structured Credit
Rating Committee Chair: Glen Leppert, Senior Vice President, U.S. Structured Credit
Initial Rating Date: October 20, 2021

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 2.2.3.1 (January 26, 2022),
https://www.dbrsmorningstar.com/research/391226

-- Cash Flow Assumptions for Corporate Credit Securitizations (January 26, 2022),
https://www.dbrsmorningstar.com/research/391225

-- Operational Risk Assessment for Collateralized Loan Obligation (CLO) and Collateralized Debt Obligation (CDO) Managers of Large Corporate Credits (September 23, 2022),
https://www.dbrsmorningstar.com/research/384628

-- Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022),
https://www.dbrsmorningstar.com/research/402153

-- Legal Criteria for U.S. Structured Finance (June 15, 2022),
https://www.dbrsmorningstar.com/research/398418