DBRS Morningstar Confirms Rating on the Class A-1 L Loans Issued by BlackRock Shasta Senior Loan Fund VII, LLC

DBRS, Inc. (DBRS Morningstar) confirmed its rating of AAA (sf) on the Class A-1 L Loans issued by BlackRock Shasta Senior Loan Fund VII, LLC pursuant to the Third Amendment to the Class A-1 L Credit Agreement (the Amended Credit Agreement), dated as of September 30, 2022, among BlackRock Shasta Senior Loan Fund VII, LLC (as Borrower), Capital One, N.A. (as Lead Lender and Administrative Agent), U.S. Bank Trust Company, National Association (as Collateral Agent), and various financial institutions and other persons from time to time (as Lenders) and pursuant to the terms and conditions of the Third Amendment to the Note Purchase and Secured Agreement (the Amended NPSA), dated as of September 30, 2022, among the Borrower (as Issuer), the Collateral Agent (as Collateral Agent, Collateral Administrator, Information Agent, and Note Agent), U.S. Bank National Association (as Custodian and Document Custodian), and the purchasers referred to therein.

The rating on the Class A-1 L Loans addresses the timely payment of interest (excluding the additional interest payable at the Post Default Rate, as defined in the Amended NPSA) and the ultimate payment of principal on or before the Stated Maturity in November 2032, in accordance with the terms and conditions and pursuant to the Amended NPSA and the Amended Credit Agreement.

RATING RATIONALE/DESCRIPTION
The rating confirmation action is the result of the annual surveillance of the transaction. The transaction is performing within DBRS Morningstar’s expectation. The Stated Maturity is November 22, 2032. The Reinvestment Period ends on November 22, 2024. The Class A-1 L Loans are collateralized primarily by a portfolio of U.S. middle-market corporate loans. BlackRock Capital Investment Advisors, LLC (BlackRock Capital) manages BlackRock Shasta Senior Loan Fund VII, LLC. DBRS Morningstar considers BlackRock Capital an acceptable collateralized loan obligation (CLO) manager.

The rating reflects the following primary considerations:

(1) The Amended Credit Agreement and the Amended NPSA, each dated as of September 30, 2022.
(2) The integrity of the transaction structure.
(3) DBRS Morningstar’s assessment of the portfolio quality.
(4) Adequate credit enhancement to withstand projected collateral loss rates under various cash flow stress scenarios.
(5) DBRS Morningstar’s assessment of the origination, servicing, and CLO management capabilities of BlackRock Capital.

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). Depending on a given Diversity Score, the following metrics are selected accordingly from the applicable row of the CQM: Weighted-Average Risk Score, Weighted-Average Spread, and Recovery Rate. DBRS Morningstar analyzed the structural configuration (as defined in Schedule G of the Indenture) 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 during its analysis are presented in the lists below.

(1) Max. Risk Score: 43.25%
(2) Min. Diversity Score: 15
(3) Min. Weighted-Average Spread: 4.50%
(4) Min. Weighted-Average Recovery Rate Test: 43.94%
(5) Max. Weighted-Average Life: 6.75 years
(6) Class A-1 Overcollateralization Test: 182.00%
(7) Class A-1 Interest Coverage Test: 150.00%

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 (Diversity Score, matrix driven); and (3) the Portfolio Manager’s expertise in CLOs and overall approach to selection of Collateral Obligations.

Some challenges were identified: (1) the weighted-average credit quality of the underlying obligors may fall below investment grade (per the CQM), and the majority may not have public ratings and (2) the underlying collateral portfolio may be insufficient to redeem the Class A-1 L Loans in an Event of Default.

As of March 13, 2023, the transaction was in compliance with all of the Collateral Quality Tests and Concentration Limitations. There were no defaulted obligations registered in the underlying portfolio.

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 ratings on the Class A-1 L 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 is used in assigning a rating to the facility.

For more information regarding DBRS Morningstar’s additional adjustment for select industries related to the Coronavirus Disease (COVID-19) 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” (https://www.dbrsmorningstar.com/research/407678), published on December 21, 2022. These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse coronavirus pandemic scenarios, which were first published in April 2020.

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 (May 17, 2022) https://www.dbrsmorningstar.com/research/396929.

Notes:
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.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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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

-- 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].