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) of Cerberus SWC Levered II LLC, pursuant to the Third Amendment to the Second Amended and Restated Loan, Security and Servicing Agreement, dated as of November 18, 2022 (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 as the Administrative Agent, Hedge Counterparty, Swingline Lender, and Arranger (rated “A” with a Stable trend by DBRS Morningstar); U.S. Bank Trust Company, National Association (rated AA (high) with a Stable trend by DBRS Morningstar) as the Collateral Custodian, U.S. Bank National Association (rated AA (high) with a Stable trend by DBRS Morningstar) as the 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.

RATING RATIONALE

The rating action is a result of the Third Amendment to the Second Amended and Restated Loan, Security and Servicing Agreement, dated as of November 18, 2022. The Revolving Period End Date is amended to February 20, 2023. The Facility Maturity Date is November 20, 2026.

In its analysis, DBRS Morningstar considered the following aspects of the transaction:

(1) The transaction’s capital structure and the form and sufficiency of available credit enhancement.
(2) Relevant credit enhancement in the form of subordination and excess spread.
(3) The ability of the Advances to withstand projected collateral loss rates under various cash flow stress scenarios.
(4) The credit quality of the underlying collateral and the ability of the transaction to reinvest Principal Proceeds into new Collateral Obligations, subject to the Eligibility Criteria, which include testing the Concentration Limitations, Collateral Quality Tests, and Coverage Tests.
(5) DBRS Morningstar’s assessment of the origination, servicing, and CLO management capabilities of Cerberus SWC Levered Holdings II LP, an affiliate of Cerberus Capital Management II, L.P.
(6) The legal structure as well as legal opinions addressing certain matters of the Borrower and the consistency with the DBRS Morningstar “Legal Criteria for U.S. Structured Finance” methodology (the Legal Criteria).

The transaction has a dynamic structural configuration that permits variations of certain asset metrics via a selection of an applicable row from a collateral quality matrix (the CQM, as defined in Schedule VIII of the Loan Agreement). Depending on a given Diversity Score (DScore), the following metrics are selected accordingly from the applicable row of the CQM: DBRS Morningstar Risk Score, Advance Rate, OC Levels, and Weighted Average Spread Level. DBRS Morningstar analyzed each structural configuration as a unique transaction, and all configurations (rows) passed the applicable DBRS Morningstar rating stress levels. The Coverage Tests and triggers as well as the Collateral Quality Tests that DBRS Morningstar modeled during its analysis are presented as below.

(1) Minimum OC Ratio: 145.9%
(2) Minimum IC Ratio: 150.0%
(3) Maximum Weighted-Average Life Test: 3.75 years
(4) Minimum Diversity Score Test: Subject to CQM; 15
(5) Maximum DBRS Morningstar Risk Score Test: Subject to CQM; 44%
(6) Minimum Weighted-Average DBRS Morningstar Recovery Rate Test: Subject to CQM; 47.62%
(7) Minimum Weighted-Average Spread (WAS) Test: Subject to CQM; 4.25%
(8) Minimum Weighted-Average Fixed Rate Coupon Test: 6.50%

The transaction is performing according to the parameters of the Loan Agreement. As of September 30, 2022, the Borrower is in compliance with all coverage and collateral quality tests. There were no defaults registered in the portfolio. The current credit quality of the portfolio is reflected in the DBRS Morningstar Risk Score of 25.64.

Some particular strengths of the transaction are (1) the collateral quality, which will consist mostly of senior-secured middle market loans; (2) the expected adequate diversification of the portfolio of collateral obligations (Diversity Score, matrix driven); and (3) the Collateral Manager’s expertise in CLOs and overall approach to selection of Collateral Obligations.

Some challenges were identified: (1) the expected weighted-average credit quality of the underlying obligors may fall below investment grade (per the CQM), and the majority may not have public ratings once purchased, and (2) the underlying collateral portfolio may be insufficient to redeem the Loans in an Event of Default.

DBRS Morningstar modeled the proposed amendment to the Loan Agreement using the DBRS Morningstar CLO Asset model and its proprietary cash flow engine, which incorporated assumptions regarding principal amortization, amount of interest generated, default timings, and recovery rates, among other credit considerations referenced in the DBRS Morningstar rating methodology “Cash Flow Assumptions for Corporate Credit Securitizations.” Model-based analysis produced satisfactory results, which supported the confirmation of the ratings on the Advances.

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.

The transaction assumptions consider DBRS Morningstar’s baseline macroeconomic scenarios for rated sovereign economies, available in its commentary “Baseline Macroeconomic Scenarios for Rated Sovereigns: September 2022 Update,” published on September 19, 2022 https://www.dbrsmorningstar.com/research/402907). These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse Coronavirus Disease (COVID-19) pandemic scenarios, which were first published in April 2020.

For more information regarding DBRS Morningstar’s additional adjustment for select industries related to the Coronavirus Disease (COVID-19), please see its May 18, 2020, commentary, “CLO Risk Exposure to the Coronavirus Disease (COVID-19)” at https://www.dbrsmorningstar.com/research/361112.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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

The principal methodologies are Rating CLOs and CDOs of Large Corporate Credit (January 26, 2022) and Cash Flow Assumptions for Corporate Credit Securitizations (January 26, 2022), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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:

Each of the principal asset class methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision, Specifically, the “Rating CLOs and CDOs of Large Corporate Credit” (January 26, 2022) methodology provides a general overview of the entire rating process and details on asset analysis. The “Cash Flow Assumptions for Corporate Credit Securitizations” (January 26, 2022) methodology outlines the assumptions and analytical approach used in cash flow analysis.

The last rating action on this transaction took place on January 4, 2022.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://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: Joseph Priolo, Senior Vice President, U.S. Structured Credit
Rating Committee Chair: Jerry van Koolbergen, Managing Director, Head of U.S. Structured Credit, Global Structured Finance
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 2.2.3.1 (January 26, 2022), https://www.dbrsmorningstar.com/research/391226

-- Cash Flow Assumptions for Corporate Credit Securitizations (January 26, 2022), https://www.dbrsmorningstar.com/research/391225

-- Operational Risk Assessment for Collateralized Loan Obligation (CLO) and Collateralized Debt Obligation (CDO) Managers of Large Corporate Credits (September 23, 2022), https://www.dbrsmorningstar.com/research/403042

-- Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022), https://www.dbrsmorningstar.com/research/402153

-- Legal Criteria for U.S. Structured Finance (June 15, 2022), https://www.dbrsmorningstar.com/research/398418