DBRS Morningstar Assigns Provisional Credit Ratings to the Revolving Advances and Term Advances Issued by Cerberus Income Levered LP

DBRS, Inc. (DBRS Morningstar) assigned the following provisional credit ratings to the Revolving Advances and Term Advances (together, the Advances) issued by Cerberus Income Levered LP, pursuant to the Credit and Security Agreement, dated as of November 9, 2023 (the CSA), among Cerberus Income Levered LP, as the Borrower, Cerberus Income Levered Holdings LP, as the Servicer, Société Générale, as the Administrative Agent, Computershare Trust Company, N.A., as the Collateral Agent and Custodian, and the Lenders party thereto:

-- Revolving Advances at AA (sf)
-- Term Advances at AA (sf)

The provisional credit ratings on the Advances address the timely payments of interest (excluding any Excess Interest Amounts, as defined in the CSA referred to above) and the ultimate payments of principal on or before the Final Maturity Date (as defined in the CSA).

CREDIT RATING RATIONALE/DESCRIPTION
Cerberus Income Levered LP is a cash flow collateralized loan obligation (CLO) transaction that is collateralized primarily by a portfolio of U.S. senior secured middle-market (MM) corporate loans. The Reinvestment Period is scheduled to end on November 9, 2025. The Final Maturity Date is November 9, 2031.

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) 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) Assessment of the CLO management capabilities of Cerberus Income Levered Holdings LP, an affiliate of Cerberus Capital Management II, L.P., as the Servicer.
(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 which permits variations of certain asset metrics via a selection of an applicable row from a collateral quality matrix (the CQM). Depending on a given Diversity Score, the following metrics are selected accordingly from the applicable row of the CQM: DBRS Morningstar Weighted Average (WA) Risk Score, Advance Rate, Weighted Average Spread (WAS), and Weighted Average Recovery Rate (WARR). DBRS Morningstar analyzed each structural configuration (as defined in Schedule 7 of the CSA) 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 in the tables below.

(1) Overcollateralization Test: Subject to CQM; 150.0%–190.0%
(2) Interest Coverage Test: 110.0%
(3) Minimum WA Spread Test: Subject to CQM; 5.00%
(4) WA Life Test: 6.5 years
(5) Minimum Diversity Score Test: Subject to CQM; 15
(6) Minimum WA DBRS Morningstar Recovery Rate Test: Subject to CQM; 48.00%
(7) Minimum WA Coupon Test: 8.00%
(8) Maximum DBRS Morningstar Risk Score Test: Subject to CQM; 41.00%

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 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 may not have public ratings once purchased, and (2) the underlying collateral portfolio may be insufficient to redeem the Advances in an Event of Default.

DBRS Morningstar modeled the transaction using the DBRS Morningstar CLO Insight 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 DBRS Morningstar’s “Global Methodology for Rating CLOs and Corporate CDOs.” Model-based analysis produced satisfactory results, which supported the credit rating on the Advances.

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 Advances.

The transaction assumptions consider DBRS Morningstar’s baseline macroeconomic scenarios for rated sovereign economies, available in its commentary “Baseline Macroeconomic Scenarios for Rated Sovereigns: September 2023 Update” (https://www.dbrsmorningstar.com/research/421227), published on September 28, 2023. 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.

DBRS Morningstar’s credit ratings on the Advances address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are interest (other than the Excess Interest Amounts), Commitment Fees and principal.

DBRS Morningstar’s credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. For example, the credit ratings on the Advances do not address Excess Interest Amounts (the additional 2% interest payable at the Post-Default Rate), Increased Costs, nor Breakage Payments.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The DBRS Morningstar short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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 methodology applicable to the credit ratings is the Global Methodology for Rating CLOs and Corporate CDOs (October 22, 2023; www.dbrsmorningstar.com/research/422269).

Other methodologies referenced in this transaction are listed at the end of this press release.

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.

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

-- Global Methodology for Rating CLOs and Corporate CDOs and DBRS Morningstar CLO Insight Model Version 1.0.0.0 (October 22, 2023)
www.dbrsmorningstar.com/research/422269

-- Legal Criteria for U.S. Structured Finance (December 7, 2022)
https://www.dbrsmorningstar.com/research/407008

-- Operational Risk Assessment for Collateralized Loan Obligations (CLOs) and Corporate Collateralized Debt Obligations (CDOs) (September 14, 2023)
https://www.dbrsmorningstar.com/research/420608

-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023)
https://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].