DBRS Morningstar Confirms Rating on Class A-1 Notes Issued by ABPCI Direct Lending Fund CLO II Ltd

DBRS, Inc. (DBRS Morningstar) confirmed its rating of AAA (sf) on the Class A-1 Senior Secured Floating Rate Notes (the Class A-1 Notes) issued by ABPCI Direct Lending Fund CLO II Ltd pursuant to the Indenture dated as of July 12, 2017, among ABPCI Direct Lending Fund CLO II Ltd, as Issuer; ABPCI Direct Lending Fund CLO II First Static Subsidiary Ltd, as First Static Subsidiary (a subsidiary of the Issuer); ABPCI Direct Lending Fund CLO II Second Static Subsidiary Ltd, as Second Static Subsidiary (a subsidiary of the Issuer); ABPCI Direct Lending Fund CLO II LLC, as Co-Issuer; and U.S. Bank National Association (rated AA (high) with a Stable trend by DBRS Morningstar) as Trustee.

The rating on the Class A-1 Notes addresses the timely payment of interest and the ultimate payment of principal on or before the Stated Maturity (as defined in the Indenture).

The Class A-1 Notes are collateralized primarily by a portfolio of U.S. middle-market corporate loans. ABPCI Direct Lending Fund CLO II Ltd is managed by AB Private Credit Investors LLC.

To assess portfolio credit quality, DBRS Morningstar provides a credit estimate or internal assessment for each nonfinancial corporate obligor in the portfolio for which a public rating is not available. 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. Assessing the priority of payments, upon an Enforcement Event (as defined in the Indenture), Administrative Expenses senior to the Class A-1 Notes will be uncapped in the Enforcement Event Priority of Payments, which could affect DBRS Morningstar’s rating on the Class A-1 Notes at that time. DBRS Morningstar ran additional stresses on the recovery rates for certain Collateral Obligations in the pool, such as Qualified First-Lien Loans and Senior Secured Loans with Senior Revolving Facilities.

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.

As the Coronavirus Disease (COVID-19) spread around the world, certain countries imposed quarantines and lockdowns, including the United States, which accounts for more than one fourth 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 United States 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 on July 22, 2020, DBRS Morningstar further considers additional adjustments to assumptions for the CLO asset class that consider the moderate economic scenario outlined in the commentary. 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. 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 there are changes in the duration or severity of the adverse disruptions.

For collateralized loan obligations, DBRS Morningstar ran an additional higher default stress on the WA DBRS Morningstar Risk Score of the current collateral obligation pool, and compared the stressed WA Risk Score with the Maximum DBRS Morningstar Risk Scores allowed in the Collateral Quality Matrix. DBRS Morningstar observed that the Collateral Quality Matrix contained sufficient rows and columns that would allow for higher stressed DBRS Morningstar Risk Scores and therefore a higher default probability on the collateral pool, while still remaining in compliance with the other Collateral Quality Tests, such as WA Spread and Diversity Score. The results of this stress indicate that the rated Class A-1 Notes can withstand an additional higher default stress 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 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; and its July 22, 2020, updated commentary, “Global Macroeconomic Scenarios: July Update” at https://www.dbrsmorningstar.com/research/364318.

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): https://www.dbrsmorningstar.com/research/361112/clo-risk-exposure-to-the-coronavirus-disease-covid-19.

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.

This rating is endorsed by DBRS Ratings Limited (DBRS Morningstar) for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

The last rating action on this transaction took place on July 12, 2019.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Lead Analyst: Quan Yoon, Assistant Vice President, U.S. Structured Credit
Rating Committee Chair: Jerry van Koolbergen, Managing Director, Head of U.S. Structured Credit
Initial Rating Date: July 2, 2017

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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-- Rating CLOs and CDOs of Large Corporate Credit and CLO Asset Model Version 2.2.3 (July 21, 2020)
https://www.dbrsmorningstar.com/research/364310/rating-clos-and-cdos-of-large-corporate-credit
-- Cash Flow Assumptions for Corporate Credit Securitizations (July 21, 2020),
https://www.dbrsmorningstar.com/research/364311/cash-flow-assumptions-for-corporate-credit-securitizations
-- Operational Risk Assessment for Collateralized Loan Obligation (CLO) and Collateralized Debt Obligation (CDO) Managers of Large Corporate Credits (September 24, 2019),
https://www.dbrsmorningstar.com/research/350807/operational-risk-assessment-for-collateralized-loan-obligation-clo-and-collateralized-debt-obligation-cdo-managers-of-large-corporate-credits
-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 6, 2019),
https://www.dbrsmorningstar.com/research/346283/interest-rate-stresses-for-us-structured-finance-transactions
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https://www.dbrsmorningstar.com/research/355719/legal-criteria-for-us-structured-finance