Morningstar DBRS Upgrades and Finalizes Provisional Credit Ratings on the Loans of BTC Holdings Fund III-B LLC

DBRS, Inc. (Morningstar DBRS) upgraded and finalized the following credit ratings to the Class A-D Loans, the Class A-R Loans, and the Class A-T Loans (together, the Loans) issued by BTC Holdings Fund III-B LLC, pursuant to the Credit Agreement, dated December 20, 2023, as amended by the First Amendment (the Amendment), dated December 13, 2024, entered into by and among BTC Holdings Fund III-B LLC, as the Borrower, The Bank of Nova Scotia, as the Administrative Agent, Citibank, N.A. as the Collateral Agent, Alter Domus (US) LLC, as the Collateral Administrator and Collateral Custodian, and the Lenders party thereto:

-- Class A-D Loans from (P) AA (sf) to AA (high) (sf)
-- Class A-R Loans from (P) AA (sf) to AA (high) (sf)
-- Class A-T Loans from (P) AA (sf) to AA (high) (sf)

The credit ratings on the Loans address the timely payment of interest (excluding the Excess Interest Amounts and the additional 2% interest payable at the Post-Default Rate, as defined in the Credit Agreement) and the ultimate payment of principal on or before the Stated Maturity (as defined in the Credit Agreement).

CREDIT RATING RATIONALE
The credit rating actions are a result of Morningstar DBRS' review of the Amendment, which upsizes the Class A-R Commitment and reduces the Applicable Margin, among other changes. The Reinvestment Period end date is October 20, 2026. The Stated Maturity Date is December 20, 2032.

The Loans are collateralized primary by a portfolio of U.S. middle-market corporate loans. BTC Holdings Fund III-B LLC is managed by Blue Torch Credit Opportunities Fund III LP (Blue Torch Capital). Morningstar DBRS considers Blue Torch Capital to be an acceptable collateralized loan obligation (CLO) manager.

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). Depending on a given Diversity Score (DScore), the following metrics are selected accordingly from the applicable row of the CQM: Morningstar DBRS WA Risk Score, Advance Rate, Weighted-Average Spread (WAS), and Overcollateralization Ratio. Morningstar DBRS analyzed each structural configuration (as defined in Schedule F of the Credit Agreement) as a unique transaction and all configurations (rows) passed the applicable Morningstar DBRS rating stress levels. The Coverage Tests and triggers as well as the Collateral Quality Tests that Morningstar DBRS modelled during its analysis are presented in the tables below.

Coverage Tests
Overcollateralization Ratio: minimum 158.60%; currently 192.95%
Interest Coverage Ratio: minimum135.00%; currently 269.31%
Advance Rate: maximum 57.50%; currently 51.83%

Collateral Quality Tests
Minimum Weighted-Average Spread: minimum 6.50%; currently 7.55%
Minimum Weighted-Average Recovery Rate: minimum 47.5%; currently 54.0%
Maximum Weighted-Average Risk Score: maximum 42.40%; currently 36.04%
Minimum Diversity Score: minimum 24.00; currently 24.58

The transaction is performing according to the contractual requirements of the Credit Agreement. As of October 31, 2024, there were no defaults registered in the portfolio.

The credit ratings also reflect the following primary considerations:

(1) The Credit Agreement, dated as of December 20, 2023.
(2) The integrity of the transaction structure.
(3) Morningstar DBRS' assessment of the portfolio quality.
(4) Adequate credit enhancement to withstand projected collateral loss rates under various cash flow stress scenarios.
(5) Morningstar DBRS' assessment of the origination, servicing, and CLO management capabilities of Blue Torch Capital.

Some particular strengths of the transaction are (1) collateral that consists of primarily U.S. senior-secured middle-market corporate loans and (2) the adequate diversification of the portfolio of collateral obligations. Some challenges were identified: (1) 10% of the portfolio holdings may consist of First Lien Last Out or Second-Lien Loans, and (2) the underlying collateral portfolio may be insufficient to redeem the Loans in an Event of Default.

Morningstar DBRS modeled the transaction using the Morningstar DBRS CLO Insight Model and its proprietary cash flow engine, which incorporated assumptions regarding principal amortization, principal prepayment, amount of interest generated, default timings, and recovery rates, among other credit considerations referenced in Morningstar DBRS "Global Methodology for Rating CLOs and Corporate CDOs." Morningstar DBRS' analysis produced satisfactory results, which, in addition to Morningstar DBRS' review of the Amendment, supported the credit rating upgrades on the Loans. The credit ratings were finalized as all Closing Date Participations were elevated to Assignment.

To assess portfolio credit quality, Morningstar DBRS provides a credit estimate or internal assessment for each nonfinancial corporate obligor in the portfolio not rated by Morningstar DBRS. Credit estimates are not ratings; rather, they represent a model-driven default probability for each obligor that DBRS Morningstar uses when rating the Loans.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

Notes:
All figures are in US dollars unless otherwise noted.

The principal methodology applicable to the credit ratings is the Global Methodology for Rating CLOs and Corporate CDOs (November 19, 2024) https://dbrs.morningstar.com/research/443207 and the CLO Insight Model v1.0.1.4.

Other methodologies referenced in this transaction are listed at the end of this press release.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

DBRS, Inc.
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The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024)
https://dbrs.morningstar.com/research/428623

Operational Risk Assessment for Collateralized Loan Obligations (CLOs) and Corporate Collateralized Debt Obligations (CDOs) (August 23, 2024) https://dbrs.morningstar.com/research/438315

Legal Criteria for U.S. Structured Finance (December 3, 2024)
https://dbrs.morningstar.com/research/444064

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.