DBRS Morningstar Confirms Credit Ratings, Removes Under Review with Developing Implications Status From the Loans of Cerberus Redwood Levered B LLC

DBRS, Inc. (DBRS Morningstar) confirmed its credit ratings on the Class A-R-1 Loans, Class A-R-2 Loans, Class A-T-1 Loans, and Class A-T-2 Loans (together, the Class A Loans) issued by Cerberus Redwood Levered B LLC as follows:

-- Class A-R-1 Loans at AA (sf)
-- Class A-R-2 Loans at AA (sf)
-- Class A-T-1 Loans at AA (sf)
-- Class A-T-2 Loans at AA (sf)

At the same time, DBRS Morningstar removed the ratings from Under Review with Developing Implications where they had been placed on November 9, 2023.

The credit ratings on the Class A loans were issued pursuant to Amendment No. 8 to the Credit Agreement, dated as of April 21, 2023, among Cerberus Redwood Levered B LLC (the Borrower); Cerberus Redwood Levered Loan Opportunities Fund B, L.P. (the Servicer and Retention Provider); Natixis, New York Branch (the Administrative Agent); U.S. Bank Trust Company, National Association (the Collateral Agent); U.S. Bank National Association (the Custodian); and the Lenders thereto.

The credit ratings on the Class A Loans address the timely payments of interest (excluding any Excess Interest Amounts and any additional interest payable pursuant to Section 2.5(c)(ii), as defined in the amended Credit Agreement) and the ultimate payments of principal on or before the Final Maturity Date (as defined in the amended Credit Agreement).

CREDIT RATING RATIONALE/DESCRIPTION
The credit rating actions are a result of DBRS Morningstar’s review of the transaction performance by applying the “Global Methodology for Rating CLOs and Corporate CDOs” (the CLO Methodology), released on October 22, 2023. On November 9, 2023, the credit ratings were placed Under Review with Developing Implications to allow DBRS Morningstar to review the credit ratings using the CLO Methodology. The Reinvestment Period ends on April 21, 2025. The Final Maturity Date is April 21, 2032.

DBRS Morningstar monitors transaction performance metrics based on the periodicity of the transaction’s reporting. The performance metrics include Collateral Quality Tests, Coverage Tests, Concentration Limitations, and Performing Collateral Par. As of November 1, 2023, the Borrower is in compliance with all performance metrics. The current transaction performance is within DBRS Morningstar’s expectations, which supports the confirmations on the Class A Loans.

The coverage and collateral quality test reported values and thresholds, respectively, that DBRS Morningstar reviewed are as follows:

(1) Overcollateralization Ratio Test: Subject to Collateral Quality Matrix (CQM); Actual 160.13% Threshold 137.06%
(2) Interest Coverage Ratio Test: Actual 175.82%; Threshold 125.00%
(3) Advance Rate Test: Subject to CQM; Actual 62.45%; Threshold 62.50%
(4) Minimum Weighted-Average (WA) Spread Test: Subject to CQM; Actual 6.45%; Threshold 5.75%
(5) Maximum WA Life Test: Actual 3.24 years; Threshold 5.50 years
(6) Minimum Diversity Score Test: Subject to CQM; Actual 31; Threshold 20
(7) Minimum WA DBRS Morningstar Recovery Rate Test: Subject to CQM; Actual 53.40%; Threshold 49.33%
(8) Maximum DBRS Morningstar Risk Score Test: Subject to CQM Actual 38.30; Threshold 29.59

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 Class A Loans in an Event of Default.

The transaction is performing according to the contractual requirements of the Credit Agreement. As of November 1, 2023, the Borrower is in compliance with all coverage and collateral quality tests as well as concentration limitations for portfolio collateral obligations. There were around $42.42 million in defaulted obligations registered in the underlying portfolio as of the November 1, 2023, trustee report date.

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,” published on September 28, 2023 (https://www.dbrsmorningstar.com/research/421227). These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse 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 pandemic, 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 methodology applicable to the credit ratings is the Global Methodology for Rating CLOs and Corporate CDOs (October 22, 2023; https://www.dbrsmorningstar.com/research/422269).

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

-- 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)

-- Legal Criteria for U.S. Structured Finance (December 7, 2023;
https://www.dbrsmorningstar.com/research/425081)

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