DBRS Morningstar Upgrades Ratings on the Loans Issued by Cerberus Onshore Levered IV LLC

DBRS, Inc. (DBRS Morningstar) upgraded its ratings to AAA (sf) from AA (sf) on each of the Class A-R Loans, the Class A-T-1 Loans, and the Class A-T-2 Loans (together, the Loans), issued by Cerberus Onshore Levered IV LLC (the Borrower), pursuant to the Credit Agreement, dated as of July 16, 2019 (as amended from time to time), among Cerberus Onshore Levered IV LLC as Borrower; Cerberus Levered IV Holdings LLC as Servicer and Retention Provider; the Lenders referred to therein; Natixis Bank, New York Branch as Administrative Agent; and U.S. Bank National Association as Collateral Agent and Custodian.

The ratings on the Loans address the timely payment 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) and the ultimate payment of principal on or before the Final Maturity Date (as defined in the Credit Agreement).

RATING RATIONALE
The rating action is a result of DBRS Morningstar’s surveillance review following the transaction exiting its Reinvestment Period on September 16, 2022, and the underlying collateral pool becoming static. The rationale for DBRS Morningstar’s ratings upgrade on the Loans is that the static-pool analysis produced significantly lower expected losses, given the greater certainty on the underlying pool of assets. Given a static pool, DBRS Morningstar analyzed the actual obligations in the pool as opposed to a hypothetical pool, governed by the covenanted test limitations. The actual pool analysis produced better than expected loss results, which warranted the upgrades.

The transaction is performing according to the contractual requirements of the Credit Agreement. As of April 3, 2023, the Borrower is in compliance with all Coverage and Asset Quality Tests, as well as the Concentration Limitation tests.

The Loans are collateralized primarily by a portfolio of U.S. middle-market corporate loans. Cerberus Levered IV Holdings LLC, an affiliate of Cerberus Capital Management II, L.P., will service the Borrower. DBRS Morningstar considers the Servicer to be an acceptable collateralized loan obligation (CLO) servicer.

The above ratings reflect the following primary considerations:

(1) The Credit Agreement dated July 16, 2019, as amended.
(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 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.

Some particular strengths of the transaction are (1) the collateral quality, which consists entirely of first-lien middle-market loans; (2) the adequate diversification of the portfolio of collateral obligations; and (3) the Collateral Manager’s expertise in CLOs and overall approach to selection of Collateral Loans.

Some challenges were identified: (1) some Collateral Loans in the portfolio have experienced a default, and (2) the underlying collateral portfolio may be insufficient to redeem the Loans in an Event of Default.

The transaction entered its amortization period on September 16, 2022 which assumes limited re-investment abilities with few exceptions such as (1) the funding of Exposure Amounts of Collateral Loans that were purchased or originated prior to the end of the Reinvestment Period and (2) the purchase or origination of Collateral Loans where the commitment to make such purchase or origination was made prior to the end of the Reinvestment Period, as defined in the Credit Agreement. To account for a static pool, DBRS Morningstar analyzed the actual obligations in the pool as reported in the trustee report on April 3, 2023. The Coverage Tests that DBRS Morningstar modeled in its analysis are presented below:

Coverage Tests:
OC Ratio: 137.06%
IC Ratio: 125.00%

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” (February 7, 2023; www.dbrsmorningstar.com/research/409499).

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 rating upgrades 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 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: 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, 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 factor(s) 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 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 2.2.3.1 (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].