DBRS Morningstar Places Provisional Rating on Class C Notes Issued by Cornhusker Funding 1C LLC Under Review with Negative Implications, Confirms Remaining Provisional Ratings

DBRS, Inc. (DBRS Morningstar) confirmed the following provisional ratings on the Class X Notes, the Class A Notes, and the Class B Notes issued by Cornhusker Funding 1C LLC (the Issuer) pursuant to the terms of the Indenture dated as of April 22, 2022, between the Issuer and U.S. Bank Trust Company, National Association:

-- Class X Notes at AAA (sf)
-- Class A Notes at BBB (sf)
-- Class B Notes at BB (sf)

DBRS Morningstar also placed its rating of B (sf) on the Class C Notes (together with the Class X Notes, the Class A Notes, and the Class B Notes, the Notes) issued by Cornhusker Funding 1C LLC Under Review with Negative Implications.

The provisional rating on the Class X Notes addresses the timely payment of interest and ultimate payment of principal on or before the Stated Maturity (as defined in the Indenture). The provisional ratings on the Class A Notes, the Class B Notes, and the Class C Notes address the ultimate payment of interest and ultimate payment of principal on or before the Stated Maturity (as defined in the Indenture).

DBRS Morningstar’s ratings on the Notes are provisional. The provisional ratings reflect the fact that the finalization of the provisional ratings is subject to satisfaction of certain conditions after the Closing Date, such as compliance with Effective Date conditions (as defined in the Indenture).

The Notes are collateralized primarily by a portfolio of U.S. middle-market corporate loans. The Issuer is managed by Mount Logan Management, LLC, which is a subsidiary of Mount Logan Capital Inc. DBRS Morningstar considers Mount Logan Management, LLC an acceptable collateralized loan obligation (CLO) manager. The Reinvestment Period ends on April 8, 2030. The Stated Maturity Date is September 15, 2036.

RATING RATIONALE
The rating actions are a result of the annual review of the transaction. The rating confirmations are a result of the Class X Notes, the Class A Notes, and the Class B Notes performing within DBRS Morningstar’s expectations. The rating on the Class C Notes was placed Under Review with Negative Implications as a result of the Class C Notes’ current performance, including the failing Class C Interest Coverage (IC) Test and the failing Diversity Score Test, as well as a slower than expected ramp-up and reinvestment of principal proceeds.

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 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 Mount Logan as the Collateral Manager.

(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 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, DBRS Morningstar selects the following metrics accordingly from the applicable row of the Collateral Quality Matrix: DBRS Morningstar Risk Score and Weighted-Average Spread Level. 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 Overcollateralization (OC) Ratio: 124.50%
Class B OC Ratio: 116.80%
Class C OC Ratio: 113.40%
Class A IC Ratio: 115.00%
Class B IC Ratio: 110.00%
Class C IC Ratio: 105.00%

Collateral Quality Tests:
Maximum Weighted-Average Life: 8 years
Maximum Diversity Score: 25
Maximum DBRS Morningstar Risk Score: 32.40%
Minimum Weighted-Average Spread: 4.70%

Some strengths of the transaction are (1) collateral quality that consists of at least 95% senior-secured middle-market loans and (2) the expected adequate diversification of the portfolio of collateral obligations (matrix-driven Diversity Score).

Some challenges are (1) up to 5% of the portfolio pool may consist of long-dated assets and (2) the underlying collateral portfolio may be insufficient to redeem the Notes 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, 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 for the Class X Notes, the Class A Notes, and the Class B Notes, which supported the confirmation of their provisional ratings.

To assess portfolio credit quality, DBRS Morningstar may provide a credit estimate or internal assessment for each nonfinancial corporate obligor in the portfolio that is not rated by DBRS Morningstar. Credit estimates are not ratings; rather, they represent an abbreviated analysis, including model-driven or statistical components of default probability for each obligor that is used in assigning a rating to a facility sufficient to assess portfolio credit quality.

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, 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, 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:
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.

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 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].