DBRS Morningstar Upgrades Rating on Notes Representing Advances to Cerberus SWC Levered II LLC

DBRS, Inc. (DBRS Morningstar) upgraded its rating to AA (high) (sf) from AA (low) (sf) on the Notes representing the Advances (the Advances) of Cerberus SWC Levered II LLC, pursuant to the Second Amended and Restated Loan, Security and Servicing Agreement dated as of November 20, 2019, as amended by the Second Amendment to the Second Amended and Restated Loan, Security and Servicing Agreement, dated as of December 23, 2020, and the Third Amendment to the Second Amended and Restated Loan, Security and Servicing Agreement, dated as of November 18, 2022 (the Loan Agreement), among Cerberus SWC Levered II LLC as the Borrower; Cerberus SWC Levered Holdings II LP as the Servicer; 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 the Collateral Custodian; U.S. Bank National Association (rated AA (high) with a Negative trend by DBRS Morningstar) as the Document Custodian; and each Lender from time to time party thereto.

The rating on the Advances addresses the timely payment of Interest, other than Interest attributable to Excess Interest Amounts (as defined in the Loan Agreement) 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).

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

CREDIT RATING RATIONALE/DESCRIPTION
The rating action is a result of the transaction exiting its Revolving Period, which ended on February 20, 2023. The Facility Maturity Date is November 20, 2026.

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 upgrade is a result of the actual pool analysis which produced satisfactory results due to the greater certainty provided by a known asset pool.

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) DBRS Morningstar’s assessment of the origination, servicing, and CLO management capabilities of Cerberus SWC Levered Holdings II LP, an affiliate of Cerberus Capital Management II, L.P.
(5) 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 Coverage Tests and triggers as well as the Collateral Quality Tests that DBRS Morningstar modeled during its analysis are presented 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
Overcollateralization (OC) Ratio: 145.90%
Interest Coverage (IC) Ratio: 150%

Collateral Quality Tests
Maximum Weighted-Average Life Test: 2.82 years
Minimum Diversity Score Test: 46.00
Maximum DBRS Morningstar Risk Score Test: 26.45
Minimum Weighted-Average DBRS Morningstar Recovery Rate Test: 53.70
Minimum Weighted-Average Spread Test: 6.79%

Some particular strengths of the transaction are (1) the collateral quality, which consists primarily of senior-secured floating-rate middle market 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 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 Loan Agreement. As of July 31, 2023, the Issuer was in compliance with all coverage and collateral quality tests. There were six defaulted loans registered in the portfolio as of July 31, 2023, which DBRS Morningstar incorporated in its analysis. The current credit quality of the portfolio is reflected in the current DBRS Risk Score of 26.45%.

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.” DBRS Morningstar analyzed each loan in the pool separately by inputting its tenor, DBRS Morningstar rating, country of origin, and industry into the DBRS CLO Asset Model. Model-based analysis produced satisfactory results, which supported the upgrade of the rating on the Advances.

For more information regarding DBRS Morningstar’s additional adjustment for select industries related to the Coronavirus Disease (COVID-19) pandemic, 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 pandemic scenarios, which were first published in April 2020.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
General 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 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.

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 November 22, 2022, when DBRS Morningstar confirmed its rating on the Advances.

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: Oxana Rhybak, Vice President, U.S. Structured Credit
Rating Committee Chair: Jerry van Koolbergen, Managing Director, U.S. Structured Credit
Initial Rating Date: November 20, 2019

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), http://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].