DBRS Morningstar Confirms AA (sf) Ratings on the Loans of Cerberus Redwood Levered B LLC

DBRS, Inc. (DBRS Morningstar) confirmed its ratings of AA (sf) on the Class A-R-1 Loans and the Class A-R-2 Loans (together, the Class A-R Loans) and on the Class A-T-1 Loans and the Class A-T-2 Loans (together, the Class A-T Loans, and together with the Class A-R Loans, the Loans) issued by Cerberus Redwood Levered B LLC, pursuant to Amendment No. 8 to the Credit Agreement, dated as of April 21, 2023, among Cerberus Redwood Levered B LLC (the Borrower), Cerberus Redwood Levered Loan Opportunities Fund B, L.P. (the Servicer and Retention Provider), Natixis, New York Branch (the Administrative Agent), U.S. Bank Trust Company, National Association (the Collateral Agent), U.S. Bank National Association (the Custodian), and the Lenders thereto.

The ratings on the Loans address the timely payments of interest (excluding any Excess Interest Amounts and any additional interest payable pursuant to Section 2.5(c)(ii), as defined in the amended Credit Agreement referred to above) and the ultimate payments of principal on or before the Final Maturity Date (as defined in the amended Credit Agreement referred to above).

RATING RATIONALE
Cerberus Redwood Levered B LLC is a cash flow collateralized loan obligation (CLO) transaction that is collateralized primarily by a portfolio of U.S. senior secured middle-market corporate loans. The Reinvestment Period ends on April 21, 2025. The Final Maturity Date is April 21, 2032.

The rating confirmations with respect to the Loans are being provided in relation to the execution of Amendment No. 8 to the Credit Agreement, dated as of April 21, 2023, which amends the Benchmark, Applicable Margin, and Interest Rate Cap on the Loans, amends the Collateral Quality Matrix, and resets certain transaction dates, such as the Reinvestment Period and Final Maturity Date, among other changes.

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 Loans 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) Assessment of the CLO management capabilities of Cerberus Redwood Levered Loan Opportunities Fund B, L.P., an affiliate of Cerberus Capital Management II, L.P., as the Servicer.
(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 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). Depending on a given Diversity Score, the following metrics are selected accordingly from the applicable row of the CQM: DBRS Morningstar Weighted-Average Risk Score, Advance Rate, Weighted-Average Spread, Weighted-Average Recovery Rate, and Overcollateralization Ratio Level. DBRS Morningstar analyzed each structural configuration (as defined in Schedule I of the Credit Agreement) 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 below.

(1) Overcollateralization Ratio Test: Subject to CQM; 137.06%
(2) Interest Coverage Ratio Test: 125.00%
(3) Minimum Weighted-Average Spread Test: Subject to CQM; 5.50%
(4) Maximum Weighted-Average Life Test: 6.00 years
(5) Minimum Diversity Score Test: Subject to CQM; 10
(6) Minimum Weighted-Average DBRS Morningstar Recovery Rate Test: Subject to CQM; 28.35%
(7) Minimum Weighted-Average Coupon Test: 8.00%
(8) Maximum DBRS Morningstar Risk Score Test: Subject to CQM; 51.00%
(9) Maximum Advance Rate: 62.5%

Some particular strengths of the transaction are (1) the collateral quality, which will consist mostly of senior-secured middle-market loans; (2) the expected adequate diversification of the portfolio of collateral obligations (Diversity Score, matrix driven); and (3) the Servicer’s expertise in CLOs and overall approach to selection of Collateral Obligations.

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

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 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.

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 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, please see its May 18, 2020, commentary “CLO Risk Exposure to the Coronavirus Disease (COVID-19)” (https://www.dbrsmorningstar.com/research/361112).

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 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; www.dbrsmorningstar.com/research/409498) and Cash Flow Assumptions for Corporate Credit Securitizations (February 7, 2023; 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. 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)
www.dbrsmorningstar.com/research/409498

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

-- 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

-- Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022) https://www.dbrsmorningstar.com/research/402153

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