DBRS Confirms Ratings on Loans Issued by Brightwood Capital Fund III 2016-2, LLC

DBRS, Inc. (DBRS) confirmed the ratings of AAA (sf) on the Class A-R Loans and Class A-T Loans (collectively, the Class A Loans) issued by Brightwood Capital Fund III 2016-2, LLC (Brightwood) up to the Total Class A-R Commitment of $40,000,000 and Total Class A-T Commitment of $372,200,000. DBRS also confirmed the rating of AA (sf) on the Class B Loans issued by Brightwood up to the Total Class B Commitment of $26,200,000 and the rating of A (sf) on the Class C Loans up to the Total Class C Commitment of $72,700,000. Brightwood is managed by Brightwood Capital Advisors, LLC.

The Class A Loans, Class B Loans and Class C Loans were issued pursuant to the Credit Agreement as of November 22, 2016, among Brightwood as Borrower; Natixis, New York Branch as Administrative Agent for the Lenders; Brightwood Capital Fund III Holdings SPV, LP as Administrative Agent for the Subordinated Noteholders; U.S. Bank National Association (rated AA (high) with a Stable trend by DBRS) as Collateral Agent and Custodian; and the Lenders and Subordinated Noteholders party thereto.

To assess portfolio credit quality, DBRS provides a credit estimate or an internal assessment for each non-financial corporate obligor in the portfolio not rated by DBRS. 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.

The DBRS ratings on the Class A Loans and Class B Loans address Brightwood’s ability to make timely payments of interest and ultimate payment of principal on or before the Stated Maturity Date (as defined in the Credit Agreement referred to above). The DBRS rating on the Class C Loans addresses Brightwood’s ability to make ultimate payments of interest and principal on or before the Stated Maturity Date.

Under the Credit Agreement, upon the occurrence and during the continuance of an Event of Default (EOD), the Collateral 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. One of these EODs is the Class A/B Overcollateralization (OC) Ratio being less than or equal to 125.0% (the EOD OC Ratio). The EOD OC Ratio is set at a higher level than typically seen, meaning a Majority of the Controlling Class may be able to liquidate the transaction while the Class B Loans and/or the Class C Loans are still performing and the Class B Loans or Class C Loans will not be able to block such liquidation or be required to be taken out in full as a test for such liquidation. Thus, the ratings assigned on the Class B Loans and C Loans are subject to additional downgrade risk and/or default for non-payment.

Additionally, under the Credit Agreement, upon the occurrence and during the continuance of an EOD, 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 (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 upon any EOD and movement to Section 6.4.

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

The principal methodology is Rating CLOs and CDOs of Large Corporate Credit, which can be found on dbrs.com under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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