CONFIDENTIAL
Driftwood CLO 2023-I, Ltd. PO Box 4927, Windward House, 3rd Floor George Town, Grand Cayman KY1-1306 Cayman Islands
June 23, 2023
Ridgeline Credit Ratings LLC 7 World Trade Center, 30th Floor New York, NY 10007
Attention: Kenji Matsuda, Director, CLO Ratings
RATING AGENCY ENGAGEMENT LETTER
Re: Driftwood CLO 2023-I — Engagement for Initial Rating Assignment and Ongoing Surveillance of Secured Notes
Dear Mr. Matsuda:
1. Introduction and Engagement
Driftwood CLO 2023-I, Ltd. (the "Issuer"), a Cayman Islands exempted company with limited liability (Registration No. EX-382916), hereby engages Ridgeline Credit Ratings LLC ("Ridgeline" or "RCR"), a Delaware limited liability company and nationally recognized statistical rating organization ("NRSRO") registered with the U.S. Securities and Exchange Commission (the "SEC"), to assign and maintain credit ratings on certain classes of secured notes (as more fully described in Section 2 below, the "Rated Notes") to be issued by the Issuer and Driftwood CLO 2023-I, LLC (the "Co-Issuer"), a Delaware limited liability company (DE File No. 7429831), in connection with the Driftwood CLO 2023-I transaction (the "Transaction").
The Transaction is a broadly syndicated collateralized loan obligation ("CLO") with a total deal value of Four Hundred Million Dollars ($400,000,000), backed by a managed portfolio of broadly syndicated first-lien senior secured leveraged loans (primarily to U.S. obligors). The Transaction is structured as a cash-flow CLO with a reinvestment period, and the notes to be issued will be offered and sold in compliance with applicable exemptions from registration under the Securities Act of 1933, as amended (the "Securities Act"), as further described herein.
The Issuer is a special purpose vehicle formed solely in connection with the Transaction. Driftwood Credit Management LLC ("DCM" or the "Collateral Manager"), a Delaware limited liability company and SEC-registered investment adviser (CRD #182447), will serve as the Collateral Manager for the Transaction. DCM is a wholly owned subsidiary of Driftwood Absolute Return Fund Ltd. ("Driftwood" or "DARF"), a Cayman Islands exempted company with limited liability (CIMA Registration No. MC-2017-02834), with approximately $6.8 billion in assets under management as of the first quarter of 2023. DCM has significant experience in the origination, management, and surveillance of broadly syndicated leveraged loan portfolios and has managed multiple CLO transactions prior to the Transaction.
The Rated Notes will be dual-rated by Ridgeline and Brindoval Analytical Services Inc. ("Brindoval" or "CAS"), another NRSRO registered with the SEC. The dual-rating requirement is a condition to certain provisions of the Indenture (as defined below) and is customary for CLO transactions of this size and type.
This engagement letter (this "Engagement Letter") has been drafted and reviewed by Calderwood & Harkness LLP ("C&H"), 450 Park Avenue, New York, NY 10022, in its capacity as issuer's counsel. This Engagement Letter sets forth the terms and conditions of Ridgeline's engagement in connection with the Transaction.
This Engagement Letter is being delivered in connection with the rating agency presentation made on June 19, 2023, at which the Collateral Manager, the Issuer's counsel, and representatives of the placement agent presented the Transaction structure, collateral pool characteristics, and capital structure to Ridgeline's CLO ratings team.
2. Notes to Be Rated
Ridgeline is engaged to assign initial credit ratings and conduct ongoing surveillance on the following classes of secured notes to be issued by the Issuer and the Co-Issuer (collectively, the "Rated Notes"):
The aggregate principal amount of the Rated Notes is Three Hundred Sixty-Four Million Dollars ($364,000,000). The Issuer will also issue $36,000,000 of Subordinated Notes (the "Subordinated Notes"), representing the unrated equity tranche of the Transaction. The Subordinated Notes are not subject to this Engagement Letter and are not being rated by Ridgeline.
Each class of Rated Notes will bear interest at a floating rate equal to Compounded SOFR (Secured Overnight Financing Rate) plus the applicable spread set forth in the table above. In the event SOFR ceases to be published or is no longer available, the reference rate will be determined in accordance with the 26253 fallback convention as specified in the Indenture. The day count convention applicable to all Rated Notes is Actual/360.
The Rated Notes will be offered pursuant to Rule 144A under the Securities Act to qualified institutional buyers and pursuant to Regulation S under the Securities Act to persons outside the United States. The minimum denomination of the Rated Notes is $250,000, with increments of $1,000 in excess thereof.
The following CUSIP and ISIN identifiers have been assigned or are expected to be assigned to the Rated Notes:
Additional CUSIP and ISIN identifiers for Regulation S classes other than Class A-1 will be provided to Ridgeline upon assignment.
3. Transaction Structure Summary
The Issuer (organized in the Cayman Islands) and the Co-Issuer (organized in Delaware) will jointly issue the Rated Notes and the Subordinated Notes under an Indenture expected to be dated August 22, 2023 (the "Indenture"), between the Issuer, the Co-Issuer, and Ironclad Trust Company, N.A. ("Ironclad Trust"), a national banking association with its corporate trust office located at 100 Wall Street, Suite 1650, New York, NY 10005. Ironclad Trust will serve as Trustee, Note Registrar, Paying Agent, Custodian, and Collateral Administrator under the Indenture. Ironclad Trust is a participant in The Depository Trust Company (DTC Participant No. 2176).
The Collateral Manager for the Transaction is Driftwood Credit Management LLC, with its principal office located at 200 Brickell Avenue, Suite 3100, Miami, FL 33131. Key personnel of DCM responsible for the management of the collateral portfolio include:
• David Hwan, Managing Director, Structured Credit — Mr. Hwan serves as the lead portfolio manager responsible for collateral selection, credit analysis, and ongoing management of the CLO portfolio;
• Marcus Sorensen, Founder & Chief Investment Officer — Mr. Sorensen provides overall investment strategy oversight and has final authority over portfolio construction and risk management;
• Elena Voss, President & Chief Operating Officer — Ms. Voss is responsible for operational management, compliance, and regulatory affairs of the Collateral Manager.
The structuring lead and placement agent for the Transaction is Meridian Atlantic Securities LLC (CRD #39821), with offices at 383 Madison Avenue, 22nd Floor, New York, NY 10179 ("Meridian Atlantic" or the "Placement Agent"). Northbridge Capital Markets Inc. ("Northbridge"), 1251 Avenue of the Americas, 34th Floor, New York, NY 10020, will serve as co-placement agent.
The target aggregate par amount of the collateral pool is $400,000,000, consisting primarily of broadly syndicated first-lien senior secured leveraged loans to U.S.-domiciled obligors. DCM has been warehousing assets in connection with the Transaction pursuant to a $250,000,000 revolving credit facility provided by Havenwood Bank, N.A. (the "Warehouse Facility"). The Warehouse Facility will be repaid in full and terminated upon the closing of the Transaction.
The following key structural dates apply to the Transaction:
• Non-Call Period: Two (2) years from the Closing Date, ending September 12, 2025. During the Non-Call Period, the Rated Notes and the Subordinated Notes may not be optionally redeemed.
• Reinvestment Period: Five (5) years from the Closing Date, ending September 12, 2028. During the Reinvestment Period, the Collateral Manager may reinvest principal proceeds from the collateral portfolio in additional eligible collateral obligations, subject to compliance with the eligibility criteria and collateral quality tests set forth in the Indenture.
• Stated Maturity: October 15, 2036, the legal final maturity date of all notes issued under the Indenture.
• Effective Date Deadline: December 12, 2023 (ninety (90) days following the expected pricing date). On or before the Effective Date, the Collateral Manager must cause the collateral pool to satisfy the Effective Date conditions set forth in the Indenture, including compliance with all collateral quality tests and coverage tests.
• Payment Date Frequency: Quarterly, on the 15th of January, April, July, and October of each year, commencing January 15, 2024 (the "First Payment Date").
• Record Date: The 15th calendar day preceding each Payment Date.
4. Capital Structure and Subordination
The complete capital structure of the Transaction, including both the Rated Notes and the unrated Subordinated Notes, is set forth below. Subordination levels reflect the percentage of the total capital structure that is junior to each class, expressed as a percentage of the aggregate deal par amount of $400,000,000.
The weighted average spread on the Rated Notes (excluding the Subordinated Notes) is approximately 195.49 basis points over Compounded SOFR. The subordination levels set forth above represent the credit enhancement available to each class of Rated Notes from the classes of notes and equity that are junior in the priority of payments waterfall.
5. Collateral Quality Tests and Eligibility Criteria
The Indenture will contain a series of eligibility criteria and collateral quality tests that the collateral pool must satisfy on the Effective Date and that must be maintained (or, in some cases, tested on each reinvestment date) during the Reinvestment Period. The following is a summary of the key collateral quality tests and eligibility criteria that are relevant to Ridgeline's rating methodology and analysis:
(a) Minimum Weighted Average Spread: The weighted average spread of the collateral portfolio shall not be less than 350 basis points.
(b) Maximum Weighted Average Life: The weighted average life of the collateral portfolio shall not exceed 7.5 years, measured from the applicable measurement date.
(c) Minimum Diversity Score: The diversity score of the collateral portfolio, as calculated in accordance with the methodology specified in the Indenture, shall not be less than 60.
(d) Maximum CCC Bucket: The aggregate principal balance of collateral obligations with a credit rating below B-/B3 (i.e., CCC+ or below) shall not exceed 7.5% of the aggregate collateral par amount (i.e., $30,000,000 based on target par of $400,000,000).
(e) Maximum Second-Lien Bucket: The aggregate principal balance of second-lien collateral obligations shall not exceed 5.0% of the aggregate collateral par amount (i.e., $20,000,000 based on target par).
(f) Maximum Fixed-Rate Bucket: The aggregate principal balance of fixed-rate collateral obligations shall not exceed 10.0% of the aggregate collateral par amount (i.e., $40,000,000 based on target par).
(g) Minimum Weighted Average Recovery Rate: The weighted average recovery rate of the collateral portfolio, as determined in accordance with the applicable rating agency recovery rate tables, shall not be less than 45.0%.
(h) Minimum Weighted Average Rating Factor (WARF): The weighted average rating factor of the collateral portfolio shall not be less than 2,850, as measured on the Brindoval Analytical Services scale. Ridgeline will apply its own proprietary WARF mapping methodology in its analysis, and the Issuer acknowledges that the Ridgeline-equivalent WARF threshold may differ from the Brindoval-scale threshold specified in the Indenture.
The Issuer and the Collateral Manager acknowledge that Ridgeline's rating analysis is based in part on the Issuer's compliance with the foregoing eligibility criteria and collateral quality tests. Any material deviation from these criteria, whether at the Effective Date or during the life of the Transaction, may result in a review of the ratings assigned to the Rated Notes.
6. Coverage Tests
The Indenture will set forth overcollateralization tests and interest coverage tests applicable to the Rated Notes. The following coverage tests will be tested on each Payment Date, commencing on the First Payment Date:
6.1 Overcollateralization (O/C) Tests
Each O/C Test measures the ratio of the aggregate adjusted collateral principal amount (as defined in the Indenture) to the aggregate outstanding principal amount of the applicable class of notes and all classes of notes that are senior thereto in the priority of payments waterfall. Failure of an O/C Test on any Payment Date triggers a diversion of interest proceeds (and, in certain cases, principal proceeds) to redeem the most senior class of outstanding notes until the applicable O/C Test is satisfied.
6.2 Interest Coverage (I/C) Tests
Each I/C Test measures the ratio of interest proceeds available on each Payment Date to the scheduled interest payments due on the applicable class of notes and all classes of notes that are senior thereto in the priority of payments waterfall. Failure of an I/C Test has consequences analogous to failure of the corresponding O/C Test, as set forth in the Indenture.
The coverage test levels set forth above are integral to Ridgeline's cash-flow modeling and rating analysis, as the coverage tests provide structural protections designed to de-lever the Transaction and redirect cash flows to protect the Rated Notes in the event of collateral pool deterioration.
7. Scope of Services
7.1 Initial Rating Assignment
Ridgeline will perform a comprehensive credit analysis of the Transaction, including, without limitation, an analysis of the proposed transaction structure, the capital structure and subordination levels, the collateral pool composition and credit quality, the eligibility criteria and collateral quality tests, the coverage tests and their trigger mechanisms, the priority of payments waterfall (including interest and principal waterfalls under both normal and post-Event of Default scenarios), and the legal structure and enforceability of the Transaction.
Ridgeline will apply its published CLO rating methodology, cash-flow models, and default and recovery assumptions to the Transaction. Ridgeline's analysis will incorporate stress scenarios across a range of macroeconomic conditions and will evaluate the sufficiency of credit enhancement at each rating level.
Ridgeline will assign initial credit ratings to the Class A-1 Notes, Class A-2 Notes, Class B Notes, Class C Notes, and Class D Notes on or prior to the pricing date, which is currently targeted for September 8, 2023. Preliminary ratings are expected to be delivered by Ridgeline on or about August 4, 2023, coinciding with the expected distribution of the Preliminary Offering Memorandum. Final ratings will be confirmed at or about the pricing date, subject to satisfaction of the conditions described in Section 7.3 below.
In connection with the initial rating assignment, Ridgeline will prepare and publish the following reports:
(a) Pre-Sale Report: A report describing the Transaction structure, collateral pool characteristics, rating rationale, key assumptions, and sensitivity analysis, to be published on or about the date preliminary ratings are assigned.
(b) New Issue Report: A report confirming the final ratings and summarizing the final Transaction terms, to be published following the pricing and closing of the Transaction.
7.2 Ongoing Surveillance
Following the initial rating assignment, Ridgeline will conduct ongoing surveillance of the Rated Notes throughout the life of the Transaction, from the Closing Date through the Stated Maturity of October 15, 2036, or such earlier date on which all Rated Notes are redeemed, repaid, or otherwise retired.
Ongoing surveillance will include, without limitation:
(a) Periodic review of collateral pool performance metrics, including but not limited to default rates, recovery rates, weighted average spread, weighted average life, diversity score, and WARF;
(b) Monitoring of compliance with the coverage tests (O/C and I/C tests) and the eligibility criteria and collateral quality tests set forth in the Indenture;
(c) Assessment of whether the ratings assigned to the Rated Notes remain appropriate in light of changes in the collateral pool, market conditions, or other factors relevant to the credit quality of the Rated Notes;
(d) Review of any material amendments, waivers, or supplements to the Indenture or other Transaction documents;
(e) Evaluation of any changes in the Collateral Manager's investment strategy, key personnel, or organizational structure that may affect the management of the collateral pool; and
(f) Consideration of macroeconomic, market, and sector-level developments that may affect the performance of broadly syndicated leveraged loans and CLO transactions generally.
Ridgeline will publish surveillance reports on the Rated Notes on at least an annual basis. Ridgeline may publish more frequent surveillance reports, rating actions, or commentaries as warranted by material changes in collateral pool performance, Transaction structure, or market conditions. Rating actions, including upgrades, downgrades, and placement on credit watch, will be published in accordance with Ridgeline's standard dissemination policies and applicable SEC regulations.
7.3 Rating Confirmation
Ridgeline will provide a written confirmation of final ratings (the "Rating Confirmation Letter") on or about the pricing date (target: September 8, 2023), confirming the assignment of the final ratings set forth in Section 2 above to each class of Rated Notes. Delivery of the Rating Confirmation Letter is expected to be a condition to closing under the Indenture and the Note Purchase Agreement.
The Rating Confirmation Letter will be addressed to the Issuer, the Co-Issuer, Ironclad Trust Company, N.A. as Trustee, and Meridian Atlantic Securities LLC as Placement Agent. A form of the Rating Confirmation Letter is attached hereto as Exhibit C.
The delivery of the Rating Confirmation Letter and the confirmation of final ratings will be subject to the following conditions:
(a) Receipt by Ridgeline of final executed versions of all material Transaction documents, including the Indenture, the Collateral Management Agreement, the Collateral Administration Agreement, and the Note Purchase Agreement;
(b) Receipt by Ridgeline of satisfactory legal opinions from the Issuer's counsel and such other counsel as may be customary for transactions of this type;
(c) Confirmation that there has been no material change in the composition, credit quality, or characteristics of the collateral pool from the terms presented to and analyzed by Ridgeline in connection with the assignment of preliminary ratings; and
(d) Confirmation that there has been no material change in the Transaction structure, capital structure, or terms of the Rated Notes from the terms presented to and analyzed by Ridgeline.
8. Information Undertakings
8.1 Issuer's Obligations
The Issuer undertakes to provide Ridgeline, on a timely basis, with access to all material Transaction documents and information necessary for Ridgeline to perform its initial rating analysis and ongoing surveillance obligations. The Issuer's information obligations include, without limitation, the provision of the following:
(a) The Indenture (including any supplements, amendments, or modifications thereto);
(b) The Collateral Management Agreement between the Issuer and DCM;
(c) The Collateral Administration Agreement between the Issuer and Ironclad Trust;
(d) The Offering Memorandum, in both preliminary form (expected date: August 4, 2023) and final form (expected date: August 18, 2023);
(e) The Note Purchase Agreement and any related agreements;
(f) Any material amendments, waivers, or supplements to any of the foregoing documents; and
(g) Such other documents and information as Ridgeline may reasonably request in connection with its rating analysis.
The Issuer shall furnish or cause to be furnished to Ridgeline (through the Collateral Manager or the Collateral Administrator, as applicable) periodic trustee reports, coverage test compliance reports, and portfolio stratification data on each Payment Date or as soon as reasonably practicable thereafter. Such reports shall include, at a minimum, the information necessary for Ridgeline to assess compliance with the collateral quality tests and coverage tests set forth in the Indenture.
The Issuer shall promptly notify Ridgeline, in writing, of the occurrence of any of the following events:
(i) Any Event of Default under the Indenture;
(ii) Any failure to satisfy any coverage test (O/C or I/C) on any Payment Date;
(iii) Any removal, resignation, or replacement of the Collateral Manager;
(iv) Any material amendment, supplement, or waiver of any Transaction document; and
(v) Any other event or circumstance that could reasonably be expected to have a material adverse effect on the credit quality of the Rated Notes or the performance of the collateral portfolio.
8.2 Collateral Manager's Cooperation
Driftwood Credit Management LLC, as the Collateral Manager, shall cooperate with Ridgeline in connection with both the initial rating process and ongoing surveillance by providing information regarding the collateral portfolio, including but not limited to trading activity, credit risk assessments, portfolio stratification reports, watch-list credits, and any changes in investment strategy or key personnel that may affect the management of the collateral pool.
The primary point of contact at DCM for purposes of communications with Ridgeline shall be David Hwan, Managing Director, Structured Credit, who serves as the portfolio manager with responsibility for collateral selection and ongoing management of the Transaction. Mr. Hwan may be reached at DCM's principal office at 200 Brickell Avenue, Suite 3100, Miami, FL 33131.
The Collateral Manager acknowledges that Ridgeline may, from time to time, request meetings or calls with DCM's investment professionals to discuss portfolio performance, credit views on individual obligors, and market conditions affecting the collateral pool, and DCM agrees to make its personnel reasonably available for such discussions.
8.3 Issuer's Counsel Coordination
Calderwood & Harkness LLP, as the Issuer's counsel, will coordinate the delivery of Transaction documents, legal opinions, and amendments to Ridgeline as necessary for Ridgeline's initial rating analysis and ongoing surveillance. C&H will serve as the primary point of contact for the delivery of legal documentation and will coordinate with Ridgeline's legal team on matters relating to the structure and enforceability of the Transaction.
The primary contacts at C&H for purposes of this Engagement Letter are:
• Samuel Eklund, Responsible Partner, Calderwood & Harkness LLP, 450 Park Avenue, New York, NY 10022; and
• Hannah Brinkley, Lead Associate, Calderwood & Harkness LLP, 450 Park Avenue, New York, NY 10022.
9. Rating Fees
9.1 Initial Rating Fee
In consideration of Ridgeline's services in connection with the initial rating assignment, including the analysis of the Transaction structure, the assignment of preliminary and final ratings to the five classes of Rated Notes, and the preparation and publication of the pre-sale report and new issue report, the Issuer shall pay Ridgeline an initial rating fee (the "Initial Rating Fee") in the amount and structure set forth in the fee schedule delivered separately to the Issuer as an addendum to this Engagement Letter. The Initial Rating Fee generally consists of a fixed base fee plus a variable component calculated in basis points on the aggregate par amount of the Rated Notes.
The Initial Rating Fee shall be payable by the Issuer from Transaction proceeds upon the earlier of (a) the assignment of preliminary ratings or (b) the Closing Date.
9.2 Annual Surveillance Fee
In consideration of Ridgeline's ongoing surveillance services, the Issuer shall pay Ridgeline an annual surveillance fee (the "Annual Surveillance Fee") in the amount set forth in the fee schedule delivered separately to the Issuer as an addendum to this Engagement Letter. The Annual Surveillance Fee shall be payable on each anniversary of the Closing Date (or on such other dates as may be agreed by the parties), commencing on the first anniversary of the Closing Date, and shall continue for the duration of the Transaction or until Ridgeline withdraws all ratings on the Rated Notes, whichever is earlier.
The Annual Surveillance Fee constitutes an operating expense of the Issuer and shall be payable as a senior expense in the priority of payments waterfall set forth in the Indenture, senior in priority to all payments of interest and principal on the Rated Notes and the Subordinated Notes.
9.3 Payment Terms
All fees payable by the Issuer to Ridgeline under this Engagement Letter shall be paid within thirty (30) days of the date of Ridgeline's invoice therefor. Fees shall be paid in United States dollars by wire transfer of immediately available funds to the account designated by Ridgeline. Wire transfer instructions will be provided by Ridgeline separately.
Late payments shall bear interest at a rate equal to the lesser of (a) 1.5% per month (compounded monthly) and (b) the maximum rate permitted by applicable law. Ridgeline reserves the right to suspend surveillance activities if fees remain unpaid for more than sixty (60) days after the due date, subject to any applicable NRSRO regulatory requirements.
10. Confidentiality
Ridgeline acknowledges that certain information provided by the Issuer, the Collateral Manager, the Issuer's counsel, and their respective representatives in connection with this engagement may constitute material nonpublic information ("MNPI") within the meaning of applicable securities laws and regulations.
Ridgeline agrees to maintain the confidentiality of such MNPI in accordance with Ridgeline's internal policies and procedures regarding the handling of confidential information and in compliance with applicable SEC regulations governing NRSROs, including, without limitation, Rule 17g-4 under the Securities Exchange Act of 1934, as amended.
Notwithstanding the foregoing, the confidentiality obligations set forth in this Section 10 shall not apply to information that:
(a) Ridgeline is required to disclose by law, regulation, or legal process, including, without limitation, subpoenas, court orders, or requests from the SEC or other regulatory authorities;
(b) Ridgeline uses in connection with its published rating opinions, rating actions, rating rationales, research reports, and other analytical publications, which are Ridgeline's independent assessment and editorial product and are not subject to the Issuer's prior review, approval, or consent;
(c) Ridgeline discloses to its affiliates, employees, directors, officers, agents, and professional advisors on a need-to-know basis, provided that such persons are subject to confidentiality obligations no less restrictive than those set forth herein; or
(d) Is or becomes publicly available other than as a result of a breach by Ridgeline of its confidentiality obligations hereunder.
The Issuer acknowledges and agrees that Ridgeline's published ratings, rating actions, rating rationales, pre-sale reports, new issue reports, surveillance reports, and other analytical publications (collectively, "Rating Publications") are Ridgeline's proprietary intellectual property and editorial product. The Issuer has no right to approve, modify, suppress, delay, or otherwise influence any rating, rating action, or Rating Publication. Ridgeline retains full editorial independence in the assignment and maintenance of its ratings.
11. Representations and Acknowledgments
11.1 Issuer Representations
The Issuer represents and warrants to Ridgeline, as of the date hereof and as of the Closing Date, that:
(a) All information and data provided or to be provided to Ridgeline in connection with the rating process, whether provided by the Issuer, the Collateral Manager, the Issuer's counsel, or any other party acting on behalf of the Issuer, is, to the Issuer's knowledge and belief after reasonable inquiry, true, accurate, and complete in all material respects as of the date such information is provided;
(b) The Issuer has not knowingly withheld any material information relevant to Ridgeline's rating analysis;
(c) The Issuer is duly organized and validly existing under the laws of the Cayman Islands and has full power and authority to enter into this Engagement Letter and to perform its obligations hereunder; and
(d) The execution, delivery, and performance of this Engagement Letter have been duly authorized by all necessary corporate action on the part of the Issuer and do not conflict with any applicable law, regulation, or agreement binding upon the Issuer.
11.2 Ridgeline Representations
Ridgeline represents and warrants to the Issuer that:
(a) Ridgeline is an NRSRO registered with the SEC and maintains all registrations and approvals necessary to conduct its business as a credit rating agency;
(b) Ridgeline maintains policies and procedures designed to manage conflicts of interest in accordance with applicable SEC regulations, including, without limitation, Regulation 17g under the Securities Exchange Act of 1934, as amended;
(c) Ridgeline's credit ratings are its independent opinion regarding the relative creditworthiness of an obligation or the relative likelihood that a specific financial obligation will be repaid in accordance with its terms. Ridgeline's ratings do not constitute, and shall not be construed as, a recommendation to purchase, sell, or hold any security, or an assessment of the market value, liquidity, or suitability of any security for a particular investor; and
(d) Ridgeline is duly organized and validly existing under the laws of the State of Delaware and has full power and authority to enter into this Engagement Letter and to perform its obligations hereunder.
11.3 Dual-Rating Acknowledgment
The Issuer acknowledges that the Rated Notes will be dual-rated by Ridgeline and Brindoval Analytical Services Inc. ("Brindoval" or "CAS"). The following principles govern the dual-rating arrangement:
(a) Ridgeline's ratings are independent of Brindoval's ratings. Each rating agency applies its own proprietary methodologies, criteria, models, assumptions, and rating scales in determining its ratings. The fact that two rating agencies assign ratings at the same or similar levels does not imply that their analyses or conclusions are identical;
(b) The Indenture requires that the Rated Notes maintain ratings from at least two NRSROs as a condition to certain actions and provisions thereunder, including, without limitation, optional redemption provisions, auction call provisions, and certain collateral quality test calculations;
(c) The Issuer shall not, and shall not direct the Collateral Manager to, use or threaten to use the rating assigned by one rating agency to exert influence or pressure on the other rating agency; and
(d) The Issuer acknowledges that Ridgeline and Brindoval may assign different ratings to the same class of notes, and any such divergence reflects the independent analytical judgment of each rating agency.
12. Limitation of Liability
Ridgeline's credit ratings are opinions regarding relative credit risk and are not guarantees of credit quality, financial performance, or the future value of any security. Ridgeline's ratings address only the likelihood that a financial obligation will be repaid in accordance with its terms and do not address any other risk, including, without limitation, market risk, liquidity risk, or price volatility.
To the maximum extent permitted by applicable law, Ridgeline shall not be liable to the Issuer, the Co-Issuer, any noteholder, any investor, or any other person or entity for any losses, damages, costs, expenses, or liabilities (whether direct, indirect, incidental, consequential, special, punitive, or otherwise) arising from or related to:
(a) Any rating assigned or any rating action taken by Ridgeline (including, without limitation, any upgrade, downgrade, withdrawal, or placement on credit watch);
(b) Any error, omission, or inadequacy in any information provided to Ridgeline by the Issuer, the Collateral Manager, the Trustee, the Collateral Administrator, or any other party;
(c) Any delay or failure in assigning, confirming, or maintaining any rating; or
(d) Any reliance by any person on any rating assigned by Ridgeline;
except, in each case, to the extent that such losses, damages, costs, expenses, or liabilities are finally determined by a court of competent jurisdiction to have resulted directly from Ridgeline's willful misconduct or gross negligence.
In no event shall Ridgeline's aggregate liability under or in connection with this Engagement Letter exceed the aggregate amount of fees actually paid by the Issuer to Ridgeline under this Engagement Letter during the twelve (12) months preceding the date on which the applicable claim arose.
The Issuer agrees not to assert, and hereby waives, any claim against Ridgeline in connection with the ratings assigned or any rating action taken, other than a claim for material breach of this Engagement Letter. The limitations and exclusions set forth in this Section 12 shall apply regardless of the form of action, whether in contract, tort (including negligence), strict liability, or otherwise.
13. Indemnification
The Issuer agrees to indemnify, defend, and hold harmless Ridgeline and its members, managers, directors, officers, employees, agents, and representatives (each, a "Ridgeline Indemnified Party") from and against any and all claims, actions, suits, proceedings, losses, liabilities, damages, judgments, settlements, fines, penalties, costs, and expenses (including, without limitation, reasonable attorneys' fees and expenses and costs of investigation) (collectively, "Losses") that any Ridgeline Indemnified Party may incur or suffer, arising out of or related to:
(a) Any breach by the Issuer of any representation, warranty, covenant, or obligation under this Engagement Letter;
(b) Any material misstatement or omission in any information, data, or documents provided to Ridgeline by or on behalf of the Issuer, the Collateral Manager, or any other party acting at the direction or on behalf of the Issuer;
(c) Any third-party claim (including, without limitation, claims by noteholders, investors, or other market participants) arising from or related to the use, reproduction, or dissemination of Ridgeline's ratings in the Offering Memorandum (whether preliminary or final), the Indenture, the Note Purchase Agreement, marketing materials, or any other Transaction document or communication; or
(d) Any claim by any governmental or regulatory authority arising from or related to the Transaction or the information provided to Ridgeline in connection therewith;
except, in each case, to the extent that such Losses are finally determined by a court of competent jurisdiction to have been caused by the willful misconduct or gross negligence of the applicable Ridgeline Indemnified Party.
The Issuer's indemnification obligations under this Section 13 shall survive the termination or expiration of this Engagement Letter and shall remain in full force and effect regardless of the basis for termination.
If any Ridgeline Indemnified Party becomes aware of any claim or proceeding for which indemnification may be sought hereunder, such Ridgeline Indemnified Party shall promptly notify the Issuer in writing; provided, however, that failure to provide timely notice shall not relieve the Issuer of its indemnification obligations except to the extent that the Issuer is materially prejudiced by such failure.
14. Use of Ratings
The Issuer may reference Ridgeline's ratings in the following Transaction documents and materials, subject to compliance with Ridgeline's published guidelines for the use of its ratings (as in effect from time to time):
(a) The Preliminary Offering Memorandum, dated on or about August 4, 2023;
(b) The Final Offering Memorandum, dated on or about August 18, 2023;
(c) The Indenture and any supplements thereto;
(d) The Note Purchase Agreement;
(e) Investor presentations, term sheets, and related marketing materials prepared by the Placement Agent or the Co-Placement Agent in connection with the initial offering of the notes; and
(f) Such other documents and communications as Ridgeline may approve in writing from time to time.
In any document or communication in which Ridgeline's ratings are referenced, the Issuer shall include Ridgeline's standard disclaimer language as specified in Ridgeline's published guidelines for the use of its ratings. The current form of Ridgeline's standard disclaimer reads substantially as follows:
"A credit rating assigned by Ridgeline Credit Ratings LLC is Ridgeline's current opinion regarding the relative creditworthiness of the rated obligation. The rating does not constitute a recommendation to purchase, sell, or hold any security and does not address the market price, yield, or suitability of any security for a particular investor. Ridgeline's ratings are subject to revision or withdrawal at any time without notice."
The Issuer shall not, in any document, communication, or marketing material, state or imply that Ridgeline has endorsed, recommended, or approved the Transaction, any class of notes, or the investment merits of any security issued in connection with the Transaction. The Issuer shall not state or imply that Ridgeline has performed or is performing an audit of the Issuer, the Collateral Manager, or any other party, or that Ridgeline has independently verified any information provided to it.
15. Withdrawal and Suspension of Ratings
Ridgeline reserves the right to withdraw, suspend, modify, upgrade, or downgrade any rating at any time in accordance with its rating policies and procedures and applicable SEC regulations governing NRSROs. Ridgeline's ratings are subject to continuous review and may be revised or withdrawn based on, among other things, changes in collateral pool performance, Transaction structure, market conditions, or the availability of information.
If Ridgeline withdraws all ratings on the Rated Notes, this Engagement Letter shall terminate automatically as of the date of such withdrawal, without the need for further action by either party; provided, however, that the provisions of Sections 10 (Confidentiality), 12 (Limitation of Liability), 13 (Indemnification), and 18 (Governing Law and Dispute Resolution) shall survive such termination.
The Issuer acknowledges that Ridgeline may withdraw ratings in the following circumstances, among others:
(a) The Issuer or the Collateral Manager fails to provide information required under Section 8 of this Engagement Letter in a timely manner, and such failure materially impairs Ridgeline's ability to conduct meaningful surveillance;
(b) The Issuer fails to pay fees due under Section 9 of this Engagement Letter when due, and such failure continues for a period of more than sixty (60) days after written notice from Ridgeline;
(c) Ridgeline determines, in its sole discretion, that it is unable to assign or maintain ratings of adequate quality due to the complexity of the Transaction or the lack of available information; or
(d) Applicable law or regulation requires or compels such withdrawal.
16. Term and Termination
This Engagement Letter shall remain in full force and effect from the date hereof through the earliest of the following dates:
(a) October 15, 2036, the Stated Maturity of the notes;
(b) The date on which all Rated Notes are redeemed, repaid, or otherwise retired in full;
(c) The date on which Ridgeline withdraws all ratings on the Rated Notes; or
(d) The date on which the parties agree in a mutual written instrument to terminate this Engagement Letter.
Either party may terminate this Engagement Letter upon ninety (90) days' prior written notice to the other party; provided, however, that Ridgeline may continue to conduct surveillance and maintain its ratings on the Rated Notes notwithstanding the termination of this Engagement Letter, if and to the extent required under applicable NRSRO regulations or if Ridgeline otherwise determines, in its sole discretion, that continued surveillance is appropriate. In such event, the provisions of this Engagement Letter relating to the scope of surveillance, information undertakings, confidentiality, limitation of liability, and indemnification shall continue to apply to the extent relevant to such continued surveillance activities.
The following Sections shall survive the termination or expiration of this Engagement Letter for any reason: Section 10 (Confidentiality), Section 12 (Limitation of Liability), Section 13 (Indemnification), and Section 18 (Governing Law and Dispute Resolution).
17. Notices
All notices, requests, demands, consents, and other communications required or permitted under this Engagement Letter shall be in writing and shall be deemed duly given when (a) delivered personally, (b) sent by nationally recognized overnight courier, (c) transmitted by email (with written confirmation of receipt), or (d) sent by registered or certified mail, return receipt requested, postage prepaid, to the parties at the following addresses (or at such other addresses as a party may designate in writing from time to time):
If to the Issuer:
Driftwood CLO 2023-I, Ltd. PO Box 4927, Windward House, 3rd Floor George Town, Grand Cayman KY1-1306 Cayman Islands
with a copy (which shall not constitute notice) to:
Driftwood Credit Management LLC 200 Brickell Avenue, Suite 3100 Miami, FL 33131