DBRS Morningstar Assigns New Rating to, Confirms One Rating of, and Discontinues and Withdraws Two Ratings of the Loans Issued by Cerberus PSERS Levered LLC

DBRS, Inc. (DBRS Morningstar) assigned a rating of AA (sf) to the Class A-T Loans, confirmed its rating of AA (sf) on the Class A-R Loans, and discontinued and withdrew the ratings of the Class A-T-1 Loans and the Class A-T-2 Loans (together with the Class A-R Loans and the Class A-T Loans, the Loans) issued by Cerberus PSERS Levered LLC, pursuant to the Credit Agreement, as amended by Amendment No. 11 to the Credit Agreement (the Credit Agreement), dated as of November 22, 2022, among Cerberus PSERS Levered LLC as the Borrower, Cerberus PSERS Levered Loan Opportunities Fund, L.P. as the Servicer, Natixis, New York Branch as the Administrative Agent, U.S. Bank National Association as the Custodian, U.S. Bank Trust Company National Association as the Collateral Agent, and each of the Lenders from time to time thereto.

The rating assignment, confirmation, and discontinue and withdraw actions above, with respect to the Loans, reflect the execution of Amendment No. 11 to the Credit Agreement dated as of November 22, 2022. The rating actions do not signify DBRS Morningstar’s approval of the amendment or its opinion as to whether the amendment is beneficial or detrimental to the holders of the Loans.

The discontinuation withdrawal of the ratings on the Class A-T-1 Loans and the Class A-T-2 Loans is a result of the merger and replacement of the Class A-T-1 Loans and the Class A-T-2 Loans into a new consolidated Class A-T Loan.

The ratings on the Loans address the timely payment of interest (excluding any Excess Interest Amounts and any additional interest payable pursuant to Section 2.5(c)(ii), as defined in the amended Credit Agreement referred to above) and the ultimate payment of principal on or before the Final Maturity Date (as defined in the amended Credit agreement referred to above).

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

RATING RATIONALE

The rating actions are a result of Amendment No. 11 to the Credit Agreement, dated as of November 22, 2022. The Reinvestment Period end date is amended to November 22, 2024. The Final Maturity Date is November 22, 2031.

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 Loans 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 PSERS Levered Loan Opportunities Fund, L.P., 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 I of the Credit Agreement). Depending on a given Diversity Score, the following metrics are selected accordingly from the applicable row of the CQM: DBRS Morningstar Risk Score, Advance Rate, Overcollateralization (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 modelled during its analysis are presented as below.

(1) Minimum OC Ratio: Subject to CQM; 137.06%
(2) Minimum IC Ratio: 125.00%
(3) Maximum Weighted-Average Life Test: 6
(4) Maximum DBRS Morningstar Risk Score Test: Subject to CQM; 24.64%
(5) Minimum Weighted-Average DBRS Morningstar Recovery Rate Test: Subject to CQM; 30.55%
(6) Minimum Weighted-Average Spread (WAS) Test: Subject to CQM; 6.00%
(7) Minimum Weighted-Average Fixed Rate Coupon Test: 8.00%

The transaction is performing according to the parameters of the Credit Agreement. The Borrower is in compliance with all coverage and collateral quality tests as well as concentration limitations for portfolio collateral obligations. There were no defaults registered in the portfolio. The current credit quality of the portfolio is reflected in the DBRS Morningstar Risk Score of 26.68.

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 in the transaction 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 Loans.

Considering the transaction performance, its legal aspects, and the results produced by the models, DBRS Morningstar assigned a rating of AA (sf) to the Class A-T-Loans and confirmed its rating of AA (sf) on the Class A-R Loans issued by Cerberus PSERS Levered LLC.

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 DBRS Morningstar uses when rating the Loans.

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 Sovereigns group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts with the baseline scenarios 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.

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

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