DBRS Morningstar Confirms BBB (sf) Credit Rating, Removes Under Review with Developing Implications Status From the Class A Variable Funding Notes of Parliament Funding III LLC

DBRS, Inc. (DBRS Morningstar) confirmed its BBB (sf) credit rating on the Class A Variable Funding Notes (the Notes) issued by Owl Rock Diversified Advisors LLC (the Borrower).

At the same time, DBRS Morningstar removed the Under Review with Developing Implications designations on the Revolving Advances and Term Loan, where they were placed on November 9, 2023.

The credit rating on the Class A Variable Funding Notes issued by Parliament Funding III LLC pursuant to the Indenture dated December 1, 2021 (as amended by the First Supplemental Indenture, dated March 24, 2022; the Second Supplemental Indenture, dated April 27, 2022; the Third Supplemental Indenture, dated December 8, 2022; the Fourth Supplemental Indenture, dated May 12, 2023; and the Fifth Supplemental Indenture, dated September 13, 2023) (the Indenture), by and between Parliament Funding III LLC, as Issuer and State Street Bank and Trust Company, as Trustee.

The credit rating on the Notes addresses the ultimate payment of principal and the ultimate payment of interest, including any Deferred Interest, but excluding the post-Event of Default interest rate of 2.00% per annum, on or before the Stated Maturity (each capitalized term as defined and) in accordance with the terms of the Indenture referenced above.

During the continuance of an Event of Default (EOD) (as defined) and in accordance with the terms of the Indenture, the unpaid principal amount of the Notes and overdue interest shall bear a post-EOD interest rate of 2.00% per annum, defined as the Default Rate in the Indenture. DBRS Morningstar’s credit rating on the Notes does not address the nonpayment risk associated with amounts associated with the 2.00% post-EOD interest.

CREDIT RATING RATIONALE
The credit rating action is 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 rating was placed Under Review with Developing Implications to allow for DBRS Morningstar to review the credit ratings using the CLO Methodology. The Reinvestment Period end date is December 1, 2026. The Final Maturity Date is December 1, 2033.

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 September 6, 2023, the Borrower is in compliance with all performance metrics. The current transaction performance is within DBRS Morningstar’s expectation, which supports the credit rating confirmation on the Class A Loans.

Some of the required performance metrics that DBRS Morningstar reviewed are listed below:

(1) Asset Coverage Test: Actual 135.97%; Threshold 123.33%
(2) Maximum Average DBRS Morningstar Risk Score Test: Subject to CQM; Actual 28.79%; Threshold 34.50%
(3) Minimum WAS Test: Subject to CQM; Actual 5.89%; Threshold 2.00%
(4) Maximum Weighted-Average Life Test: Actual 4.63; Threshold 6.50
(5) Minimum DScore: Subject to CQM; Actual 35.98; Threshold 8.00
(6) Maximum Advance Rate: Actual 73.55%; Threshold 75.00%

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 Collateral Manager’s expertise in CLOs and overall approach to selection of Collateral Obligations.

Some challenges were identified: (1) the expected weighted-average 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 Notes in an EOD.

The transaction assumptions consider DBRS Morningstar’s baseline macroeconomic scenarios for rated sovereign economies, available in its commentary “Baseline Macroeconomic Scenarios For Rated Sovereigns - December 2023 Update”, published on December 19, 2023 (https://www.dbrsmorningstar.com/research/425506). These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse 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.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 rating 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 rating process for this rating action.

DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

Lead Analyst: Anthony Bell, Senior Analyst , Structured Credit
Rating Committee Chair: Jerry van Koolbergen, Managing Director, Structured Credit
Initial Rating Date: April 29, 2022

DBRS, Inc.
140 Broadway, 43rd Floor
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.

-- 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/legal-criteria-for-us-structured-finance)

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