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

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the Class A-1 Notes and Class A-2 Notes at AAA (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 (the Indenture), by and among the Co-Issuers and Wells Fargo Bank, National Association as the Trustee.

In addition, DBRS Morningstar upgraded its ratings on five classes of notes as follows:

-- Class B-1 Notes to AA (high) (sf) from AA (sf)
-- Class B-2 Notes to AA (high) (sf) from AA (sf)
-- Class C Notes to A (high) (sf) from A (sf)
-- Class D Notes to A (low) (sf) from BBB (sf)
-- Class E Notes to BBB (low) (sf) from BB (high) (sf)

The ratings on the Class A-1 Notes, Class A-2 Notes, Class B-1 Notes, and Class 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 Notes, Class D Notes, and Class 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.

VCP CLO II is a cash flow collateralized loan obligation (CLO) transaction that is backed primarily by a portfolio of U.S. senior secured broadly syndicated corporate loans and is 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 DBRS Morningstar’s surveillance review following the transaction entering its amortization period on April 15, 2023. The Stated Maturity is April 15, 2031. DBRS Morningstar upgraded the ratings on the Class B-1 Notes, Class B-2 Notes, Class C Notes, Class D Notes, and Class E Notes given the current portfolio composition post-Reinvestment Period. The transaction otherwise is performing within expectations.

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) DBRS Morningstar’s assessment of the origination, servicing, and CLO management capabilities of Vista Credit Partners, L.P. as the Collateral Manager.
(5) 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.

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 diversification of the portfolio of collateral obligations (Diversity Score of 41). Some challenges were identified: (1) the expected WA credit quality of the underlying obligors may fall below investment grade and (2) the underlying collateral portfolio may be insufficient to redeem the Secured Notes in an Event of Default.

The transaction entered its amortization period on April 15, 2023, which assumes limited re-investment abilities with a few exceptions such as the Substitution Events, as defined in the Indenture. To account for a static pool, DBRS Morningstar analyzed the actual obligations in the pool as reported in the trustee report on April 5, 2023. The Coverage Tests that DBRS Morningstar modeled in its 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%

The transaction is performing according to the parameters of the Indenture. As of April 5, 2023, the Issuer is in compliance with all Coverage and Collateral Quality Tests, as well as the Concentration Limitation tests. There were no defaulted obligations registered in the underlying portfolio to date.

DBRS Morningstar modeled the transaction using the DBRS 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.”

DBRS Morningstar analyzed each loan in the pool separately by inputting its tenor, DBRS Morningstar rating, country of origin, and industry into the CLO Asset Model. The model-based analysis, along with the cash flow engine output, produced satisfactory results, which supported the confirmations and upgrades on the Secured Notes mentioned above.

The transaction assumptions consider DBRS Morningstar’s baseline macroeconomic scenarios for rated sovereign economies, available in its commentary “Baseline Macroeconomic Scenarios for Rated Sovereigns: April 2023 Update (https://www.dbrsmorningstar.com/research/413218). 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, 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 ratings are Rating CLOs and CDOs of Large Corporate Credit and CLO Asset Model Version 2.2.3.1 (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.

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.

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, “Rating CLOs and CDOs of Large Corporate Credit” (February 7, 2023) provides a general overview of the entire rating process and details on asset analysis. “Cash Flow Assumptions for Corporate Credit Securitization” (February 7, 2023) outlines the assumptions and analytical approach used in cash flow analysis.

The last rating action on this transaction took place on March 6, 2023.

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. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

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: February 5, 2021

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 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), 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

A description of how DBRS Morningstar analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/278375.

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