DBRS Morningstar Finalizes its Provisional Ratings on the Revolving Advances and Term Advances Issued by Cerberus Redwood Levered A II LLC

DBRS, Inc. (DBRS Morningstar) finalized the following provisional ratings on the Revolving Advances and Term Advances (together, the Advances) issued by Cerberus Redwood Levered A II LLC, pursuant to the Credit and Security Agreement (the CSA), dated as of April 13, 2023, among Cerberus Redwood Levered A II LLC, as the Borrower; Cerberus Redwood Levered A Holdings II LLC, as the Servicer; Société Générale, as the Administrative Agent; Computershare Trust Company, N.A., as the Collateral Agent and Custodian; and the Lenders party thereto:

-- Revolving Advances at AA (sf)
-- Term Advances at AA (sf)

The ratings on the Advances address the timely payments of interest (excluding any Excess Interest Amounts, as defined in the CSA) and the ultimate repayments of principal on or before the Final Maturity Date (as defined in the CSA).

CREDIT RATING RATIONALE/DESCRIPTION

These rating actions are a result of DBRS Morningstar’s surveillance review of the transaction, which included notice of the elevation of participation interests in the loans and satisfaction of the Eligibility Criteria (as defined in the CSA). Cerberus Redwood Levered A II LLC is a cash flow collateralized loan obligation (CLO) transaction that is collateralized primarily by a portfolio of U.S. senior secured middle-market (MM) corporate loans. The Reinvestment Period is scheduled to end on April 13, 2025. The Final Maturity Date is April 13, 2031.

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 Advances 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 A Holdings II LLC, 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 Legal Criteria).

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 (DScore), the following metrics are selected accordingly from the applicable row of the CQM: DBRS Morningstar WA Risk Score, Advance Rate, Weighted-Average Spread (WAS), Weighted-Average Recovery Rate (WARR) and Overcollateralization Test. DBRS Morningstar analyzed each structural configuration (as defined in Schedule 7 of the CSA) 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 modelled during its analysis are presented in the tables below.

(1) Overcollateralization Test: Subject to CQM; 190% or 150%
(2) Interest Coverage Test: 110.00%
(3) Minimum Weighted-Average Spread Test: Subject to CQM; 5.00%
(5) Minimum Diversity Score Test: Subject to CQM; 15
(6) Minimum Weighted-Average DBRS Morningstar Recovery Rate Test: Subject to CQM; 48.00%
(7) Minimum Weighted-Average Coupon Test: 8.00%
(8) Maximum DBRS Morningstar Risk Score Test: Subject to CQM; 41.00%

DBRS Morningstar’s credit ratings on the advances address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations include the interest at the Interest Rate and the principal amounts on the Advances.

DBRS Morningstar’s credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. For example, the public ratings on the Advances do not address any Excess Interest Amounts (as defined in the CSA), which are payable contingent upon the occurrence of an Event of Default (as defined in the CSA).

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

Some challenges were identified: (1) the weighted-average (WA) credit quality of the underlying obligors may fall below investment grade, and (2) the underlying collateral portfolio may be insufficient to redeem the Advances in an Event of Default.

The transaction is performing according to the contractual requirements of the CSA. As of June 1, 2023, the Borrower is in compliance with all other Coverage and Collateral Quality Tests, as well as the Concentration Limitation tests, and other Eligibility Criteria as per definition in the CSA. There were no defaulted obligations registered in the underlying portfolio as of June 1, 2023.

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, which supported the finalization of the provisional ratings on the Advances.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

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 https://www.dbrsmorningstar.com/research/416784/ (July 4, 2023).

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodologies applicable to the credit 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.

These credit ratings were initiated at the request of the rated entity.

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

This is a solicited credit rating.

DBRS, Inc.
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Tel. +1 212 806-3277

The credit 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

-- 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 (June 9, 2023), https://www.dbrsmorningstar.com/research/415687

-- Legal Criteria for U.S. Structured Finance (December 7, 2022),
https://www.dbrsmorningstar.com/research/407008

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/410863.

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