DBRS Morningstar Assigns Credit Rating to Notes Issued by GLQC II D.A.C.

DBRS Ratings GmbH (DBRS Morningstar) assigned a AA (low) credit rating to the EUR 2,500,000,000 Notes due 2033 (the Notes) issued by GLQC II D.A.C. (GLQC II or the Issuer). The credit rating on the Notes addresses the timely payment of scheduled interest and the ultimate repayment of principal by the legal maturity date in September 2033.

GLQC II is a perpetual investment vehicle ultimately owned and managed by The Goldman Sachs Group, Inc. (GS). The Issuer invests primarily in loans and bonds issued by high-yield corporate borrowers, predominantly across Europe. The Issuer is managed by a subsidiary of GS, which is viewed as very strong by DBRS Morningstar. The Issuer’s investment mandate is broad, with loose eligibility criteria and no concentration metrics.

The Notes are a secured obligation of the Issuer and have recourse to the unencumbered assets of the Issuer. The Issuer also benefits from a guarantee provided by GS for the prompt and complete payment of all current and future liabilities of GLQC II with respect to obligations arising under the Notes (the GS Guarantee). DBRS Morningstar currently has a Long-Term Issuer Rating on GS of A (high) with a Stable trend. The Notes are currently backed by a USD 4.1 billion portfolio consisting of a diverse pool of senior secured loans, covenant-lite loans, bonds, and unsecured loans to European corporate borrowers (with a small pocket in the U.S. and Asia).

As GLQC II’s liabilities with respect to the Notes are guaranteed by GS, DBRS Morningstar applied Appendix 3 of its “Rating European Structured Finance Transactions Methodology”, which describes DBRS Morningstar's approach to rating transactions when there are multiple independent sources of cash flows that are each sufficient for the timely repayment of interest and the full repayment of principal of the rated securities (Dual-Recourse Securities). DBRS Morningstar defines the Issuer’s assets and the GS Guarantee as the two sources of cash flows. Only in the event of joint default of both sources of support (credits) will the Dual-Recourse Securities experience an event of default.

DBRS Morningstar used its CLO Insight Model to analyse the portfolio based on investment-level characteristics that drive assumptions around probability of default and recoveries for each investment. These characteristics include the credit quality, domicile, seniority, maturity, obligor, and industry diversity. As of 10 October 2023, the portfolio consisted of 160 investments to 75 borrowers. To determine the credit quality of the current portfolio, DBRS Morningstar assigned credit estimates to the majority of the assets, with a small bucket benefitting from public credit ratings. The DBRS Morningstar Weighted-Average Risk Score (WARS) for the assets with either an assigned credit estimate or benefitting from a public credit rating (73% of the portfolio) stands at 29.5%, in line with a B (low) average credit quality. DBRS Morningstar considered a credit quality of CCC (high) for the assets with no assigned credit estimate and not benefitting from a public credit rating (27% of the portfolio), leading to an aggregate WARS of 34.6%, slightly below B (low) quality. These characteristics, together with the asset manager’s track record and investment strategy, are aggregated to determine the applicable Asset Coverage Ratio (ACR) and Advance Rate (AR) ranges, which align with a BBB-range assessment.

Based on the comparison between the probabilities of default of the two credits, DBRS Morningstar determined the Issuer’s assets to be the lower-rated credit and the GS Guarantee to be the higher-rated credit. According to Appendix 3 of the “Rating European Structured Finance Transactions Methodology”, the amount of uplift starts from the higher-rated credit and is a function of the lower credit rating and the degree of overlap in the assets’ drivers of default risk. Based on a high overlap between the two credits, DBRS Morningstar assigned an uplift of one notch on top of the higher-rated credit. Hence, the credit rating assigned to the Notes is AA (low).

The Notes rank senior to a Multi-Currency Loan (MCL) and a Profit-Participating Loan (PPL), ensuring structural subordination. The MCL and the PPL are part of the Issuer’s liabilities and are both granted by entities part of the GS group, but they are repaid in a junior position compared with the Notes in the priority of payments.

The portfolio is currently composed of 75 obligors, with the top three borrower exposures representing 7.3%, 4.0%, and 3.5% of the pool, respectively. The current pool is geographically well diversified, with the top three exposures by country being the UK (31.5%), Germany (19.6%), and France (9.6%). The assets are also well diversified across industries, with the top three industries (based on DBRS Morningstar industry classification) representing Software (20.4%), Diversified Financial Services (16.1%), and Healthcare Providers and Services (14.6%). The current weighted-average tenor of the portfolio is 4.3 years, while the current seniority breakdown based on DBRS Morningstar’s Corporate Recovery Rates classification is Senior Secured Covenant-Lite Loans (74.4%), Senior Secured Bonds (4.7%), and Second Lien and Senior Unsecured (20.9%). The Issuer is exposed to foreign exchange (FX) risk because of assets denominated in several currencies, with the top three being euros (53.5%), U.S. dollars (21.4%), and British pound sterling (20.4%). The MCL’s purpose is to fund investments in different currencies and therefore constitutes a partial mitigant to FX risk.

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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (4 July 2023).

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies are the Global Methodology for Rating Debt Issued by Investment Funds (22 October 2023), https://www.dbrsmorningstar.com/research/422270/global-methodology-for-rating-debt-issued-by-investment-funds and the Rating European Structured Finance Transactions Methodology (Appendix 3: Dual-Recourse Securities) (6 October 2023), https://www.dbrsmorningstar.com/research/421599/rating-european-structured-finance-transactions-methodology.

In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (4 July 2023), in its consideration of ESG factors.

The following methodologies have also been applied:
-- Global Methodology for Rating CLOs and Corporate CDOs (22 October 2023) and CLO Insight Model version 1.0.0.0,
https://www.dbrsmorningstar.com/research/422269/global-methodology-for-rating-clos-and-corporate-cdos
-- DBRS Morningstar Global Criteria: Corporate Credit Estimates (6 October 2023),
https://www.dbrsmorningstar.com/research/421555/dbrs-morningstar-global-criteria-corporate-credit-estimates

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

The sources of information used for this credit rating include Morningstar, Inc. and Company Documents.

DBRS Morningstar received the following data and information:
-- Portfolio loan-by-loan information as at 10 October 2023; and
-- A presentation describing the GS Asset Management Private Credit platform.

DBRS Morningstar considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

This credit rating concerns a newly issued financial instrument. This is the first DBRS Morningstar credit rating on this financial instrument.

DBRS Morningstar does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar's outlooks and credit ratings are under regular surveillance.

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.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/422963

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Daniele Canestrari, Assistant Vice President
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 6 November 2023
Last Rating Date: Not applicable as there is no last rating date.

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