DBRS Morningstar Confirms Ratings on the Class A-1 Notes and the Class A Loans Issued by Cerberus Loan Funding XXIV L.P.

DBRS, Inc. (DBRS Morningstar) confirmed its rating of AAA (sf) on the Class A-1 Senior Secured Floating-Rate Notes (the Class A-1 Notes or the Notes) issued by Cerberus Loan Funding XXIV L.P. (Cerberus or the Issuer) pursuant to the Indenture dated August 7, 2018, among Cerberus, as Issuer; Cerberus LFGP XXIV, LLC, as General Partner; Cerberus Co-Issuer XXIV LLC, as Co-Issuer; Cerberus Business Finance, LLC (CBF), as Servicer; and Wells Fargo Bank, N.A. (rated AA with a Stable trend by DBRS Morningstar), as Trustee. DBRS Morningstar also confirmed its rating of AAA (sf) on the Class A Senior Secured Loans (the Class A Loans or the Loans) issued by Cerberus as the Borrower, pursuant to the Class A Loan Agreement, dated August 7, 2018, among the Borrower, Cerberus Co-Issuer XXIV LLC as the Co-Borrower, the General Partner, the Trustee, and each of the Class A Lenders hereto.

The ratings on the Notes and the Loans (together, the Debt) address the timely payments of interest and the ultimate payments of principal on or before the Stated Maturity (as defined in the Indenture referred to above).

The Debt issued by Cerberus is collateralized primarily by a portfolio of U.S. middle-market (MM) corporate loans. Cerberus is managed by CBF as Servicer. DBRS Morningstar considers CBF an acceptable collateralized loan obligation (CLO) manager.

CREDIT RATING RATIONALE
The rating actions are a result of DBRS Morningstar’s annual review of the transaction. The Reinvestment Period ended on July 15, 2022. The Stated Maturity Date is July 15, 2030. The purchase or funding of Collateral Loans is not permitted after the end of the Reinvestment Period, unless committed to or purchased during the Reinvestment Period.

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 rating confirmations are a result of the Debt performing within DBRS Morningstar’s expectations.

In its analysis, DBRS Morningstar considered the following aspects of the transaction:

(1) The Indenture, dated as of August 7, 2018.
(2) The Class A Loan Agreement, dated August 7, 2018.
(3) The integrity of the transaction structure.
(4) DBRS Morningstar’s assessment of the portfolio quality.
(5) Adequate credit enhancement to withstand projected collateral loss rates under various cash flow stress scenarios.
(6) DBRS Morningstar’s assessment of the origination, servicing, and CLO management capabilities of CBF.

The Coverage Tests and triggers as well as the Collateral Quality Tests that DBRS Morningstar modeled during its analysis are presented in the tables below. The modeling incorporated the actual reported levels of the tests and used recent portfolio assets and their characteristics to analyze the current performance of the transaction.

Coverage Tests
Class A/B Overcollateralization (OC) Ratio: 154.4%
Class C OC Ratio: 133.0%
Class D OC Ratio: 125.7%

Coverage Tests
Class A/B Interest Coverage (IC) Ratio: 165.0%
Class C IC Ratio: 135.0%
Class D IC Ratio: 125.0%

Collateral Quality Tests
Maximum Weighted-Average Life Test: 3.09 years
Minimum Diversity Score Test: 28
Maximum DBRS Morningstar Risk Score Test: 54.60%
Minimum Weighted-Average DBRS Morningstar Recovery Rate Test: 39.63%
Minimum Weighted-Average Spread (WAS) Test: 6.25%

Some particular strengths of the transaction are (1) the collateral quality, which consists primarily of senior-secured floating-rate MM loans and (2) the Collateral Manager’s expertise in CLOs and overall approach to selection of Collateral Loans. Some challenges identified were (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 Debt in an Event of Default.

The transaction is performing according to the contractual requirements of the Indenture. As of July 3, 2023, the Issuer is in compliance with all coverage and collateral quality tests. There were 13 defaulted loans registered in the portfolio as of July 3, 2023, which DBRS Morningstar incorporated in its analysis. The current credit quality of the portfolio is reflected in the current DBRS Risk Score of 28.45%.

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 confirmation of the ratings on the Debt. Taking into consideration the current portfolio performance, the transaction structure, and the results produced by the models, DBRS Morningstar confirmed the ratings on the Notes and the Loans at AAA (sf).

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.

The transaction assumptions consider DBRS Morningstar’s baseline macroeconomic scenarios for rated sovereign economies, available in its commentary “Baseline Macroeconomic Scenarios for Rated Sovereigns: June 2023 Update,” published on June 30, 2023 (https://www.dbrsmorningstar.com/research/416703). These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse COVID-19 pandemic scenarios, which were first published in April 2020.

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/416784 (July 4, 2023).

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 credit rating was 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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

This credit 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 credit ratings:

Each of the principal asset class methodologies employed in the analysis addressed one or more particular risks or aspects of the credit rating and were factored into the credit rating decision, Specifically, the “Rating CLOs and CDOs of Large Corporate Credit” (February 7, 2023) methodology provides a general overview of the entire rating process and details on asset analysis. The “Cash Flow Assumptions for Corporate Credit Securitizations” (February 7, 2023) methodology outlines the assumptions and analytical approach used in cash flow analysis.

The last credit rating action on this transaction took place on August 18, 2022.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication/. 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: Joseph Priolo, Senior Vice President, U.S. Structured Credit
Rating Committee Chair: Jerry van Koolbergen, Managing Director, U.S. Structured Credit Initial Rating Date: June 29, 2018

DBRS, Inc.
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New York, NY 10005 USA
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

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

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].