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

DBRS, Inc. (DBRS Morningstar) confirmed its rating of AAA (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 (as amended by the First Amendment dated as of July 6, 2020, and the Second Amendment dated as of February 17, 2022) (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 Stable trend by DBRS Morningstar) as the Administrative Agent, Hedge Counterparty, Swingline Lender, and Arranger; U.S. Bank Trust Company, National Association (rated AA (high) with a Stable trend by DBRS Morningstar) as Collateral Custodian; U.S. Bank, National Association (rated AA (high) with a Stable trend by DBRS Morningstar) as 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 amended Loan Agreement referred to above) and the ultimate payment of the aggregate principal amount of all Advances outstanding on or before the Facility Maturity Date (as defined in the amended Loan Agreement referred to above).

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.

RATING RATIONALE
The rating action is a result of the annual surveillance review of the transaction. DBRS Morningstar confirmed the ratings on the Advances as the current transaction performance is within DBRS Morningstar’s expectation. The Stated Maturity is February 19, 2029. The Reinvestment Period ends on February 17, 2025.

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 Servicer’s origination, servicing, and CLO management capabilities.
(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 Amended and Restated Loan, Security and Servicing 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, Weighted-Average (WA) Recovery Rate, and WA 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 in its base case analysis are presented below.

Coverage Tests:
OC Ratio: 162.60%
IC Ratio: 150.00%

Collateral Quality Tests:
WA Life Test: 6.25
DScore: 30
Maximum DBRS Morningstar Risk Score Test: 34
WA Spread: 6.25%
WA Coupon: 6.50%

Some particular strengths of the transaction are (1) the collateral quality, which consists mostly of senior-secured middle market loans; (2) the adequate diversification of the portfolio of collateral obligations (DScore currently at 44 compared with test level of 30); and (3) the Collateral Manager’s expertise in CLOs and overall approach to selection of Collateral Obligations. Some challenges were identified as follows: (1) up to 35% of the portfolio pool may consist of long-dated assets and (2) the underlying collateral portfolio may be insufficient to redeem the Advances in an Event of Default.

The transaction is performing according to the contractual requirements of the Amended and Restated Loan, Security and Servicing Agreement. As of December 31, 2022, the Borrower is in compliance with all Coverage and Collateral Quality Tests, as well as the Concentration Limitation tests. There were around $21.54 million in defaulted obligations registered in the underlying portfolio as of December 31, 2022.

DBRS Morningstar modeled the transaction using the DBRS Morningstar CLO Asset model and its proprietary cash flow engine, which incorporated assumptions regarding principal amortization, the 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 final 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: December 2022 Update,” published on December 21, 2022 (https://www.dbrsmorningstar.com/research/407678). 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, AND 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 applicable to the rating are Rating CLOs and CDOs of Large Corporate Credit (February 7, 2023; https://www.dbrsmorningstar.com/research/409498;) and Cash Flow Assumptions for Corporate Credit Securitizations (February 7, 2023; https://www.dbrsmorningstar.com/research/409499).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.com/about/methodologies.

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. The “Rating CLOs and CDOs of Large Corporate Credit” methodology (February 7, 2023) provides a general overview of the entire rating process and details on asset analysis. The “Cash Flow Assumptions for Corporate Credit Securitizations” methodology (February 7, 2023) outlines the assumptions and analytical approach used in cash flow analysis.

The last rating action on this transaction took place on February 18, 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: Oxana Rhybak, Vice President, U.S. Structured Credit
Rating Committee Chair: Jerry van Koolbergen, Managing Director, U.S. Structured Credit
Initial Rating Date: January 31, 2020

DBRS, Inc.
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New York, NY 10005 USA
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The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Rating CLOs and CDOs of Large Corporate Credit and CLO Asset Model Version 2.2.3.1 (February 7, 2023), https://www.dbrsmorningstar.com/research/409498/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 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 (December 7, 2022), https://www.dbrsmorningstar.com/research/407008

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