DBRS Morningstar Assigns AA (sf) Rating to Class A-T-2 Loans and Confirms AA (sf) Ratings on Class A-R and Class A-T-1 Loans of Cerberus 2112 Levered LLC

DBRS, Inc. (DBRS Morningstar) assigned a rating of AA (sf) to the Class A-T-2 Loans and confirmed its ratings of AA (sf) on the Class A-R Loans and the Class A-T-1 Loans (f/k/a the Class A-T Loans, and together with the Class A-R Loans and the Class A-T-2 Loans, the Loans) issued by Cerberus 2112 Levered LLC, pursuant to the Credit Agreement dated October 8, 2020 (as amended by Amendment No. 1 dated December 23, 2020; Amendment No. 2 dated July 20, 2021; Amendment No. 3 dated February 4, 2022; Amendment No. 4 dated October 7, 2022; and Amendment No. 5 dated March 3, 2023), among Cerberus 2112 Levered LLC as the Borrower; Cerberus 2112 Credit Holdings LLC as the Servicer; Natixis, New York Branch as the Administrative Agent; U.S. Bank Trust Company, National Association (rated AA (high) with a Stable trend by DBRS Morningstar) as the Collateral Agent; U.S. Bank National Association (rated AA (high) with a Stable trend by DBRS Morningstar) as the Custodian; and the Lenders party thereto.

RATING RATIONALE
The rating actions are a result of the Amendment No. 5 to the Credit Agreement (the Amendment), dated March 3, 2023. The Maturity Date of the Loans is October 7, 2031. The Amendment upsizes the transaction’s total committed amount by $100 million through the issuance of the Class-A-T-2 Loans and renames the Class A-T Loans as the Class A-T-1 Loans, among other changes.

The rating rationale for the confirmation of the ratings on the Class A-T-1 Loans and the Class A-R Loans is that the current transaction performance is within DBRS Morningstar’s expectations, and the Amendment, including the issuance of the Class A-T-2 Loans, does not negatively affect the ratings on the Loans.

In its analysis, DBRS Morningstar considered the following aspects of the transaction:
(1) The Credit Agreement, dated October 8, 2020, as amended from time to time.
(2) The integrity of the transaction’s structure pursuant to the Amendment.
(3) DBRS Morningstar’s assessment of the portfolio quality.
(4) Relevant credit enhancement in the form of subordination and excess spread.
(5) Adequate credit enhancement to withstand DBRS Morningstar’s projected collateral loss rates under various cash flow stress scenarios.
(6) DBRS Morningstar’s assessment of the origination, servicing, and collateralized loan obligation (CLO) management capabilities of Cerberus 2112 Credit Holdings LLC, an affiliate of Cerberus Capital Management II, L.P.

The transaction has a dynamic structural configuration, which 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 (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 modelled during its analysis are presented below:

-- Overcollateralization Test: Subject to Collateral Quality Matrix; 137.06%
-- Interest Coverage Test: Subject to Collateral Quality Matrix; 125.00%
-- Maximum Weighted-Average (WA) Life Test: 5.75 years
-- Minimum Diversity Score: Subject to Collateral Quality Matrix; 20
-- Maximum DBRS Morningstar Risk Score Test: Subject to Collateral Quality Matrix; 32.79%
-- Minimum WA DBRS Morningstar Recovery Rate Test: Subject to Collateral Quality Matrix; 47.65%
-- Minimum WA Spread (WAS) Test: Subject to Collateral Quality Matrix; 6.00%
-- Minimum WA Fixed Rate Coupon (WAC) Test: 8.00%

Some particular strengths of the transaction are: (1) collateral quality, which will consist primarily of senior-secured floating-rate MM loans; (2) the adequate diversification of the current portfolio of collateral obligations (actual DScore of 41, which exceeds the threshold of 20); and (3) the Collateral Manager’s expertise in CLOs and overall approach to selection of Collateral Obligations. One of the challenges identified was that the majority of the underlying loans have no public ratings and require either credit estimate and/or private rating from DBRS Morningstar.

The transaction is performing according to the contractual requirements of the Credit Agreement. As of January 3, 2023, 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 underlying portfolio to date. Approximately 41% of the collateral are rated B, followed by about 30% rated B (high).

Model-based analysis produced satisfactory results, which supported the confirmation of the ratings on the Loans.

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.

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

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. These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse pandemic scenarios, which were first published in April 2020.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 (May 17, 2022).

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

The principal methodologies applicable to the ratings 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 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.

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.

DBRS, Inc.
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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 DBRS Morningstar CLO Asset Model Version 2.3.1 (February 7, 2023)
http://www.dbrsmorningstar.com/research/409498

Cash Flow Assumptions for Corporate Credit Securitizations (February 7, 2023)
http://www.dbrsmorningstar.com/research/409499

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

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

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