DBRS Morningstar Confirms Rating on Notes Representing Advances to Cerberus SWC Levered II LLC

DBRS, Inc. (DBRS Morningstar) confirmed its rating of AA (low) (sf) on the Notes representing the Advances (the Advances) to Cerberus SWC Levered II LLC under the Second Amended and Restated Loan, Security and Servicing Agreement dated as of November 20, 2019 (the Loan Agreement) among Cerberus SWC Levered II LLC as the Borrower; Cerberus SWC Levered Holdings II LP as the Servicer; Capital One, National Association (rated “A” with a Negative trend by DBRS Morningstar) as the Administrative Agent, Hedge Counterparty, Swingline Lender, and Arranger; U.S. Bank National Association (rated AA (high) with a Negative trend by DBRS Morningstar) as the Collateral Custodian and Document Custodian; and each Lender from time to time party thereto.

The rating on the Advances addresses the timely payment of Interest, other than Interest attributable to Excess Interest Amounts (as defined in the Loan Agreement) and the ultimate payment of the aggregate principal amount of all Advances outstanding on or before the Facility Maturity Date (as defined in the Loan Agreement).

The Advances are collateralized primarily by a portfolio of U.S. middle-market corporate loans. The servicer for Cerberus SWC Levered II LLC is Cerberus SWC Levered Holdings II LP, an affiliate of Cerberus Capital Management II, L.P. DBRS Morningstar considers Cerberus SWC Levered Holdings II LP to be an acceptable collateralized loan obligation (CLO) servicer.

The rating reflects the following primary considerations:

(1) The Loan Agreement dated as of November 20, 2019.
(2) The integrity of the transaction structure.
(3) DBRS Morningstar’s assessment of the portfolio quality.
(4) Adequate credit enhancement to withstand projected collateral loss rates under various cash flow stress scenarios.
(5) DBRS Morningstar’s assessment of the Servicer’s origination, servicing, and CLO management capabilities.

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 is used in assigning ratings to a facility.

Under the Loan Agreement, upon the occurrence and during the continuance of an Event of Default or Termination Date, the Servicer (or, after delivery of a Notice of Exclusive Control, the Administrative Agent) shall direct all available funds to be applied in accordance with Section 2.8 of the Loan Agreement. Under Section 2.8, Administrative Expenses senior to the Advances would be uncapped, which could result in DBRS Morningstar downgrading its rating on the Advances at that time.

As the Coronavirus Disease (COVID-19) spread around the world, certain countries imposed quarantines and lockdowns, including the United States, which alone accounts for more than one-fourth of confirmed cases worldwide. The coronavirus pandemic has negatively affected not only the economies of the countries with the highest infection rates but also the overall global economy, with diminished demand for goods and services as well as disrupted supply chains. The effects of the pandemic may result in deteriorated financial conditions for many companies and obligors, some of which will experience the effects of such negative economic trends more intensely 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 in its “Global Macroeconomic Scenarios: June Update” commentary on June 1, 2020; “Global Macroeconomic Scenarios: July Update” commentary on July 22, 2020; and “Global Macroeconomic Scenarios: September Update” commentary on September 10, 2020, DBRS Morningstar further considers additional adjustments to assumptions for the CLO asset class that consider the moderate economic scenario outlined in the commentaries. 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 pandemic. 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 the duration or severity of the adverse disruptions caused by the coronavirus change.

For CLOs, DBRS Morningstar ran an additional higher default adjustment on the WA DBRS Morningstar Risk Score of the current collateral obligation pool and then ran this adjusted modeling pool through the DBRS Morningstar CLO Asset Model to generate a stressed default rate. DBRS Morningstar then performed a cash flow model analysis to determine the breakeven default rate for the rated debt. The breakeven default rate is computed over nine combinations of default timing and interest rate stresses. The breakeven default rate must exceed the lifetime total default rate generated by the DBRS Morningstar CLO Asset Model for the debt to achieve the rating. The results of this adjustment indicate that the Advances can withstand an additional higher default stress commensurate with a moderate-scenario impact of the coronavirus pandemic.

For more information regarding DBRS Morningstar’s simplified set of macroeconomic scenarios for select economies related to the coronavirus, 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; its July 22, 2020, updated commentary, “Global Macroeconomic Scenarios: July Update” at https://www.dbrsmorningstar.com/research/364318; and its September 10, 2020, updated commentary, “Global Macroeconomic Scenarios: September Update” at https://www.dbrsmorningstar.com/research/366543.

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)” at https://www.dbrsmorningstar.com/research/361112.

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.

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:

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: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Lead Analyst: Quan Yoon, CFA, Assistant Vice President
Rating Committee Chair: Jerry van Koolbergen, Managing Director, U.S. Structured Credit
Initial Rating Date: November 20, 2019

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

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 (July 21, 2020) https://www.dbrsmorningstar.com/research/364310/rating-clos-and-cdos-of-large-corporate-credit

-- Operational Risk Assessment for Collateralized Loan Obligation (CLO) and Collateralized Debt Obligation (CDO) Managers of Large Corporate Credits (September 22, 2020)
https://www.dbrsmorningstar.com/research/366977/operational-risk-assessment-for-collateralized-loan-obligation-clo-and-collateralized-debt-obligation-cdo-managers-of-large-corporate-credits

-- Cash Flow Assumptions for Corporate Credit Securitizations (July 21, 2020)
https://www.dbrsmorningstar.com/research/364311/cash-flow-assumptions-for-corporate-credit-securitizations

-- Interest Rate Stresses for U.S. Structured Finance Transactions (October 23, 2020)
https://www.dbrsmorningstar.com/research/361961/interest-rate-stresses-for-us-structured-finance-transactions

-- Legal Criteria for U.S. Structured Finance (January 21, 2020)
https://www.dbrsmorningstar.com/research/355719/legal-criteria-for-us-structured-finance