DBRS Morningstar Confirms Rating on the Revolving Advances and Assigns New Ratings to the Term Loan Issued by Cerberus RR Levered LLC

DBRS Inc. (DBRS Morningstar) confirmed its rating of AAA (sf) on the Revolving Advances (formerly known as the Advances) and assigned a rating of AAA (sf) to the Term Loan (together with the Revolving Advances, the Loans) issued by Cerberus RR Levered LLC, pursuant to the Loan, Security and Servicing Agreement, dated as of May 5, 2022, as amended by the First Amendment to the Loan, Security and Servicing Agreement, dated as of December 1, 2022, and by the Second Amendment to the Loan, Security and Servicing Agreement, dated as of September 14, 2023 (the Loan Agreement), by and among Cerberus RR Levered LLC as the Borrower; Cerberus RR Levered Holdings LP as the Servicer and as the Transferor; Capital One, National Association (rated “A” with a Stable trend by DBRS Morningstar) as the Administrative Agent, Hedge Counterparty, Swingline Lender, and Arranger; U.S. Bank Trust Company, National Association (rated AA (high) with a Negative trend by DBRS Morningstar) as Collateral Custodian; U.S. Bank National Association (rated AA (high) with a Negative trend by DBRS Morningstar) as Document Custodian; and each of the Lenders from time to time party thereto.

The rating actions, with respect to the Loans, reflect the execution of the Second Amendment to the Loan, Security and Servicing Agreement, dated as of September 14, 2023. The rating actions do not signify DBRS Morningstar’s approval of the amendment or its opinion as to whether the amendment is beneficial or detrimental to the holders of the Loans.

The rating on the Loans addresses the timely payment of Interest, other than Interest attributable to Excess Interest Amounts (as defined in the Loan Agreement referred to above), and the ultimate payment of the aggregate principal amount of all Advances outstanding on or before the Facility Maturity Date (as defined in the Loan Agreement referred to above).

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

CREDIT RATING RATIONALE/DESCRIPTION
The rating actions are a result of the Second Amendment to the Loan, Security and Servicing Agreement dated as of September 14, 2023. The Scheduled Revolving Period End Date is March 14, 2026. The Facility Maturity Date is March 14, 2030.

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 Loans 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) DBRS Morningstar’s assessment of the origination, servicing, and CLO management capabilities of Cerberus RR Levered Holdings LP, an affiliate of Cerberus Capital Management II, L.P.
(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 the selection of an applicable row from a collateral quality matrix (the CQM, as defined in the Loan Agreement). Depending on a given Diversity Score, the following metrics are selected accordingly from the applicable row of the CQM: DBRS Morningstar Risk Score, Advance Rate, Overcollateralization (OC) Levels, and Weighted-Average (WA) Spread Level. DBRS Morningstar analyzed each structural configuration 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 below.

(1) Minimum OC Ratio: 162.60%
(2) Total Interest Coverage Ratio Test: 150.00%
(3) Maximum WA Life Test: 6.50
(4) Minimum Diversity Test: Subject to CQM: 8
(5) Maximum DBRS Morningstar Risk Score Test: Subject to CQM: 52.40%
(6) Minimum WA DBRS Morningstar Recovery Rate Test: Subject to CQM: 39.97%
(7) Minimum WA Spread Test: Subject to CQM: 4.25%
(8) Minimum WA Fixed Rate Coupon Test: 6.50%

The transaction is performing according to the parameters of the Loan Agreement. The Borrower is in compliance with all coverage and collateral quality tests. Any breaches in concentration limitations are subject to excess concentration haircuts. There were no defaults registered in the portfolio. The current credit quality of the portfolio is reflected in its DBRS Morningstar Risk Score of 25.03.

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, CQM-driven); and (3) the Servicer’s expertise in CLOs and overall approach to selection of Collateral Obligations.

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

DBRS Morningstar analyzed the proposed amendment to 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 rating on the Loans.

Considering the amendment, the transaction performance, its legal aspects, and the results produced by the analysis, DBRS Morningstar confirmed its rating of AAA (sf) on the Revolving Advances and assigned a rating of AAA (sf) to the Term Loan issued by Cerberus RR Levered 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 Loans.

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 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 credit rating are 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) 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.

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.

-- 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].