DBRS Morningstar Confirms Rating of BBB (sf) on the Class A Variable Funding Notes of Parliament Funding III LLC

DBRS, Inc. (DBRS Morningstar) confirmed its rating of BBB (sf) on the Class A Variable Funding Notes (the Notes) issued by Parliament Funding III LLC pursuant to the Indenture dated December 1, 2021 (as amended by the First Supplemental Indenture, dated March 24, 2022; the Second Supplemental Indenture, dated April 27, 2022; the Third Supplemental Indenture, dated December 8, 2022; the Fourth Supplemental Indenture, dated May 12, 2023; and the Fifth Supplemental Indenture, dated September 13, 2023) (the Indenture), by and between Parliament Funding III LLC, as Issuer and State Street Bank and Trust Company, as Trustee.

The credit rating on the Notes addresses the ultimate payment of principal and ultimate payment of interest, including any Deferred Interest, but excluding the post-Event of Default interest rate of 2.00% per annum, on or before the Stated Maturity (each capitalized term as defined and) in accordance with the terms of the Indenture referenced above.

During the continuance of an Event of Default (EOD) (as defined) and in accordance with the terms of the Indenture, the unpaid principal amount of the Notes and overdue interest shall bear a post-EOD interest rate of 2.00% per annum, defined as the Default Rate in the Indenture. DBRS Morningstar’s credit rating on the Notes does not address the nonpayment risk associated with amounts associated with the 2.00% post-EOD interest.

CREDIT RATING RATIONALE/DESCRIPTION
The rating confirmation with respect to the above-mentioned Notes is being provided in relation to the execution of the Fifth Supplemental Indenture, dated September 13, 2023, entered into between the Issuer and the Trustee, which increases the Maximum Principal Amount on the Notes.

The Notes are collateralized primarily by a portfolio of U.S. middle-market corporate loans. The Issuer is managed by Owl Rock Diversified Advisors LLC, an affiliate of Blue Owl Capital Inc. DBRS Morningstar considers Owl Rock Diversified Advisors LLC an acceptable collateralized loan obligation (CLO) manager.

The rating reflects the following primary considerations:
(1) The Indenture, as amended from time to time.
(2) The integrity of the transaction’s structure.
(3) DBRS Morningstar’s assessment of the portfolio quality and covenants.
(4) Adequate credit enhancement to withstand DBRS Morningstar’s projected collateral loss rates under various cash flow-stress scenarios.
(5) DBRS Morningstar’s assessment of the origination, servicing, and CLO management capabilities of Owl Rock Diversified Advisors LLC.
(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 permits variations of certain asset metrics via a selection of an applicable row from a collateral quality test matrix (the CQM, as defined in Schedule 5 of the Indenture). Depending on a given Diversity Score (DScore), the following metrics are selected accordingly from the applicable row of the CQM: Maximum Average DBRS Morningstar Risk Score Test, and Weighted-Average Spread (WAS). DBRS Morningstar analyzed each structural configuration as a unique transaction, and all configurations (matrix points) passed the applicable DBRS Morningstar rating stress levels. The Coverage Tests and triggers as well as the Collateral Quality Tests that DBRS Morningstar modeled during its analysis are presented below.

(1) Asset Coverage Test: 119.87%
(2) Maximum Average DBRS Morningstar Risk Score Test: Subject to CQM; 38.60%
(3) Minimum WAS Test: Subject to CQM; 4.75%
(4) Maximum Weighted Average Life Test: 6.50
(5) Minimum DScore: Subject to CQM; 20
(6) Minimum Weighted Average Coupon Test: 5.00%
(7) Maximum Advance Rate: 77%

Some particular strengths of the transaction are (1) the collateral quality, which will consist mostly of senior-secured middle-market loans; (2) the expected adequate diversification of the portfolio of collateral obligations (Diversity Score, matrix driven); and (3) the Collateral Manager’s expertise in CLOs and overall approach to selection of Collateral Obligations.

Some challenges were identified: (1) the expected weighted-average credit quality of the underlying obligors may fall below investment grade (per the CQM), and the majority may not have public ratings once purchased, and (2) the underlying collateral portfolio may be insufficient to redeem the Notes in an EOD.

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.” Model-based analysis produced satisfactory results that supported the assignment of the ratings on the Notes.

Considering the transaction structure, its legal aspects, and the results produced by the models, DBRS Morningstar confirmed the ratings above on the Notes issued by Parliament Funding III LLC.

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 DBRS Morningstar uses when rating the Notes.

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

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