DBRS Morningstar Confirms and Upgrades Ratings on the Secured Notes Issued by VCP CLO II, Ltd.

DBRS, Inc. (DBRS Morningstar) upgraded its rating on the Class E Notes (together with the Class A-1, A-2, B-1, B-2, C, and D Notes, the Secured Notes) to BB (high) (sf) from BB (sf), issued by VCP CLO II, Ltd. (the Issuer of VCP CLO II) and VCP CLO II, LLC (the Co-Issuer; together, with the Issuer, the Co-Issuers) pursuant to the Indenture dated as of March 4, 2021, by and among the Co-Issuers and Wells Fargo Bank, National Association as the Trustee.

In addition, DBRS Morningstar confirmed its ratings on the remaining classes of Secured Notes as follows:

-- Class A-1 Notes at AAA (sf)
-- Class A-2 Notes at AAA (sf)
-- Class B-1 Notes at AA (sf)
-- Class B-2 Notes at AA (sf)
-- Class C Notes at A (sf)
-- Class D Notes at BBB (sf)

The ratings on the Class A-1, A-2, B-1, and B-2 Notes address the Issuer’s ability to make timely payments of interest and ultimate payments of principal on or before the Stated Maturity Date (as defined in the Indenture). The ratings on the Class C, D, and E Notes address the Issuer’s ability to make ultimate payments of interest and ultimate payments of principal on or before the Stated Maturity Date (as defined in the Indenture).

VCP CLO II is a cash flow collateralized loan obligation (CLO) transaction that is collateralized primarily by a portfolio of U.S. senior secured broadly syndicated corporate loans and will be managed by Vista Credit Partners, L.P. DBRS Morningstar considers Vista Credit Partners, L.P. an acceptable CLO manager.

RATING RATIONALE
The rating actions are a result of the annual review of the transaction. DBRS Morningstar upgraded its rating on the Class E Notes as the tranche experienced strong cushion improvement since last surveillance, and DBRS Morningstar confirmed its ratings on the remaining classes of Secured Notes as the transaction was otherwise performing as expected. The Stated Maturity is April 15, 2031. The Reinvestment Period ends on April 15, 2023.

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 Secured Notes 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 Vista Credit Partners, L.P. as the Collateral Manager.

The transaction has a dynamic structural configuration that is used to determine which of the row/column combinations (each, a Matrix Case) are applicable for the purpose of determining compliance with the matrix, as set forth in the Indenture. Depending on a given Diversity Score (DScore), the following metrics are selected accordingly from the applicable row of the Asset Quality Matrix: DBRS Morningstar Risk Score, Weighted Average Spread (WAS) and DBRS Weighted Average Recovery Rate (WARR). DBRS Morningstar analyzed each structural configuration as a unique transaction, and all Matrix Cases 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:
Class A/B OC Ratio: 134.92%
Class C OC Ratio: 123.57%
Class D OC Ratio: 119.00%
Class E OC Ratio: 114.54%
Class A/B IC Ratio: 120.00%
Class C IC Ratio: 115.00%
Class D IC Ratio: 110.00%

Collateral Quality Tests:
Weighted Average Life: 5 years
DBRS Morningstar Diversity Test: 31
Maximum DBRS Morningstar Risk Score: 34.75%
Minimum WAS: 4.00%
Minimum WARR: 47.75%

Some particular strengths of the transaction are (1) collateral quality that consists of at least 92.5% senior-secured broadly syndicated loans; and (2) the adequate diversification of the portfolio of collateral obligations (DScore currently at 40). Some challenges were identified as follows: (1) up to 15% of the portfolio pool may consist of Cov-Lite Loans; and (2) the underlying collateral portfolio may be insufficient to redeem the Secured Notes in an Event of Default.

The transaction is performing according to the parameters of the Indenture. As of January 4, 2023, the Borrower is in compliance with all Coverage and Collateral Quality Tests, as well as the Concentration Limitation tests. There were no defaulted obligation registered in the underlying portfolio to date.

DBRS Morningstar modeled 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 finalization of the provisional ratings on the Secured Notes.

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 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/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 ratings are Rating CLOs and CDOs of Large Corporate Credit (https://www.dbrsmorningstar.com/research/409498; February 7, 2023) and Cash Flow Assumptions for Corporate Credit Securitizations (https://www.dbrsmorningstar.com/research/409499; February 7, 2023).

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. Specifically, the “CLOs and CDOs of Large Corporate Credit ” provides an general overview of the entire rating process and details on asset analysis. The “Cash Flow Assumptions for Corporate Credit Securitization Methodology” outlines the assumptions and analytical approach used in cash flow analysis.

The last rating action on this transaction took place on March 7, 2022.

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: Sharon Shen, Senior Analyst, U.S. Structured Credit
Rating Committee Chair: Jerry van Koolbergen, Managing Director, U.S. Structured Credit
Initial Rating Date: February 5, 2021

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

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