DBRS Morningstar Confirms Provisional Ratings on the Secured Notes of BlackRock DLF IX CLO 2021-1, LLC

DBRS, Inc. (DBRS Morningstar) confirmed its provisional ratings on the Class A-1 Notes, Class A-2 Notes, Class B Notes, Class C Notes, Class D Notes, Class E Notes, and Class W Notes (the Secured Notes) issued by BlackRock DLF IX CLO 2021-1, LLC, pursuant to the Note Purchase and Security Agreement (the NPSA) dated as of March 30, 2021, and amended on August 10, 2022 (the Amendment), among BlackRock DLF IX CLO 2021-1, LLC, as the Issuer; U.S. Bank National Association (rated AA (high) with a Stable trend by DBRS Morningstar), as the Collateral Agent, Custodian, Document Custodian, Collateral Administrator, Information Agent, and Note Agent; and the Purchasers referred to therein as follows:

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

The provisional ratings on the Class A-1 Notes and the Class A-2 Notes address the timely payment of interest (excluding the additional interest payable at the Post-Default Rate, as defined in the NPSA) and the ultimate payment of principal on or before the Stated Maturity of March 30, 2031.

The provisional ratings on the Class B Notes, the Class C Notes, the Class D Notes, the Class E Notes, and the Class W Notes address the ultimate payment of interest (excluding the additional interest payable at Post-Default Rate, as defined in the NPSA) and the ultimate payment of principal on or before the Stated Maturity of March 30, 2031. The Class W Notes will have a fixed-rate coupon that is lower than the spread/coupon of some of the more-senior Secured Notes, including the Class E Notes, and could therefore be considered below market rate.

The provisional ratings reflect the fact that the finalization of the provisional ratings are subject to certain conditions after the Closing Date of March 30, 2021, such as compliance with certain eligibility criteria (the Eligibility Criteria). Provisional ratings are not final ratings with respect to the above-mentioned Secured Notes and may change or be different than the final ratings assigned or may be discontinued. The assignment of final ratings on the Secured Notes is subject to receipt by DBRS Morningstar of all data and/or information and final documentation that DBRS Morningstar deems necessary to finalize the ratings.

The Secured Notes are collateralized primarily by a portfolio of U.S. senior secured middle-market (MM) corporate loans, which is managed by BlackRock Capital Investment Advisors, LLC (BlackRock Capital or BCIA) as the Collateral Manager. BlackRock Capital is a wholly owned subsidiary of BlackRock, Inc. (BlackRock). DBRS Morningstar considers BCIA an acceptable collateralized loan obligation (CLO) manager.

RATING RATIONALE
The rating action is a result of the surveillance review of the transaction. DBRS Morningstar confirmed the ratings on the Secured Notes as the current transaction performance is within DBRS Morningstar’s expectation, while also accounting for the minimum WA Spread test failing in its analysis. The Stated Maturity is March 30, 2031. The Reinvestment Period ends on March 30, 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 Secured Notes to withstand projected collateral loss rates under various cash flow stress scenarios.
(4) The credit quality of the underlying collateral, which consists primarily of senior-secured floating-rate MM loans, 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 BCIA.
(6) The legal structure as well as legal opinions addressing certain matters of the Issuer 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 G of the NPSA). 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 (row) as a unique transaction, and all configurations 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.

DBRS Morningstar models tests and triggers as defined in the NPSA:

Class A OC Ratio 143.97
Class B OC Ratio 134.18
Class C OC Ratio 124.95
Class D OC Ratio 115.33
Class E OC Ratio 107.54

Class A IC Ratio 150.00
Class B IC Ratio 140.00
Class C IC Ratio 130.00
Class D IC Ratio 120.00
Class E IC Ratio 110.00
Class W IC Ratio 100.00

Collateral Quality Tests:

Minimum WA Spread Test: 5.0%, Subject to the Collateral Quality Matrix
Minimum WA Coupon Test: 6.0%
Maximum DBRS Morningstar Risk Score Test: 54, Subject to the Collateral Quality Matrix
Minimum Diversity Score Test: 8, Subject to the Collateral Quality Matrix
Minimum WA DBRS Morningstar Recovery Rate Test: 43.5%, Subject to the Collateral Quality Matrix
Maximum WA Life Test: 7.25 years minus the product of: (1) 0.25 and (2) the number of Quarterly Payment Dates since the second anniversary of the Closing Date
Maximum Advance Rate: 89.13%, Subject to the Collateral Quality Matrix

Some particular strengths of the transaction are (1) the collateral quality, which consists mostly of senior-secured floating-rate middle market loans; (2) the adequate diversification of the portfolio of collateral obligations (the current DScore of 37 compared with test level of 30); and (3) no long-dated assets that mature after the Stated Maturity are permitted to be purchased. Some challenges were identified as follows: (1) the weighted-average (WA) credit quality of the underlying obligors may fall below investment grade and may not have public ratings 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 contractual requirements of the NPSA and the Amendment. As of January 30, 2023, the minimum WA Spread test is failing (reported 5.809% vs threshold of 6.000%). The Issuer is in compliance with all other Coverage and Collateral Quality Tests, as well as the Concentration Limitation tests. There were no defaulted obligations registered in the underlying portfolio as of January 30, 2023.

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 provisional ratings on the Secured Notes.

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 provides a general overview of the entire rating process and details on asset analysis. The “Cash Flow Assumptions for Corporate Credit Securitizations” methodology outlines the assumptions and analytical approach used in cash flow analysis.

The last rating action on this transaction took place on March 30, 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: March 30, 2021.

DBRS, Inc.
140 Broadway, 43rd Floor
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

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

-- 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].