DBRS Morningstar Confirms Rating on the Notes Representing the Advances to Cerberus ND Levered LLC

DBRS, Inc. (DBRS Morningstar) confirmed the rating of AA (low) (sf) on the Notes representing the Advances to Cerberus ND Levered LLC, pursuant to the Amended and Restated Loan, Security and Servicing Agreement, dated as of January 31, 2020 (the Loan Agreement), by and among Cerberus ND Levered LLC as the Borrower; Cerberus ND Credit Holdings LLC 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 Collateral Custodian and Document Custodian; and each of the Lenders 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. Cerberus ND Levered LLC is serviced by Cerberus ND Credit Holdings LLC, an affiliate of Cerberus Capital Management II, L.P. DBRS Morningstar considers Cerberus ND Credit Holdings LLC to be an acceptable collateralized loan obligation (CLO) servicer.

The rating reflects the following primary considerations:

(1) The Loan Agreement dated as of January 31, 2020.
(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 this Section 2.8, Administrative Expenses senior to the Advances would be uncapped, which could result in downgrades to DBRS Morningstar’s 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 U.S., which alone accounts for more than one-quarter 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 U.S. 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: January 2021 Update” on January 28, 2021, 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 CLOs, 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 Loan Advances 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 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 January 28, 2021, updated commentary, “Global Macroeconomic Scenarios: January 2021 Update” at https://www.dbrsmorningstar.com/research/372842/global-macroeconomic-scenarios-january-2021-update.

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 can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is Rating CLOs and CDOs of Large Corporate Credit (February 8, 2021), 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 for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings:

The last rating action on this transaction took place on January 31, 2020.

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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

Lead Analyst: Quan Yoon, Vice President, U.S. Structured Credit
Rating Committee Chair: Jerry van Koolbergen, Managing Director, U.S. Structured Credit
Initial Rating Date: January 31, 2020

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 (February 8, 2021) https://www.dbrsmorningstar.com/research/373423/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 (February 8, 2021)
https://www.dbrsmorningstar.com/research/373422/cash-flow-assumptions-for-corporate-credit-securitizations

-- Interest Rate Stresses for U.S. Structured Finance Transactions (October 23, 2020)
https://www.dbrsmorningstar.com/research/368786/interest-rate-stresses-for-us-structured-finance-transactions

-- Legal Criteria for U.S. Structured Finance (December 21, 2020)
https://www.dbrsmorningstar.com/research/371685/legal-criteria-for-us-structured-finance