Morningstar DBRS Assigns Credit Rating to the Advances of Cerberus Stepstone Levered LLC

DBRS, Inc. (Morningstar DBRS) assigned the following credit rating to the Advances of Cerberus Stepstone Levered LLC, pursuant to the Facility Agreement, dated as of January 4, 2024 by and among Cerberus Stepstone Levered LLC, as the Borrower, Cerberus Stepstone Credit Holdings LLC, as the Servicer, NatWest Markets Plc, as the Lead Lender, Alter Domus (US) LLC, as the Loan Agent, Computershare Trust Company, N.A., as the Collateral Agent and Collateral Custodian, and each of the Lenders from time to time party thereto:

-- Advances at A (high) (sf)

The credit rating on the Advances addresses the timely payment of interest (excluding any Step-Up Margin, Prepayment Penalty, Costs and Expenses, Break Costs, and/or Indemnified Amounts, as defined in the Facility Agreement) and the ultimate payment of principal on or before the Facility Maturity Date (as defined in the Facility Agreement).

CREDIT RATING RATIONALE/DESCRIPTION
Cerberus Stepstone Levered LLC 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. Cerberus Stepstone Levered LLC is serviced by Cerberus Stepstone Credit Holdings LLC, an affiliate of Cerberus Capital Management II, L.P. (Cerberus). Morningstar DBRS considers Cerberus to be an acceptable collateralized loan obligation (CLO) manager. The Reinvestment Period is scheduled to end on January 4, 2026. The Facility Maturity Date is January 4, 2034.

The credit ratings reflect the following primary considerations:

(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 Loans, subject to the Eligibility Criteria, Concentration Limitations, Collateral Quality Tests, and Senior Coverage Tests.
(5) Assessment of the CLO management capabilities of Cerberus Stepstone Credit Holdings LLC, 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 Morningstar DBRS “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: Maximum Morningstar DBRS Risk Score, Minimum Weighted Average Morningstar DBRS Recovery Rate (WARR), Minimum Weighted Average Spread (WAS), Minimum Weighted Average Coupon (WAC), and Advance Rate. Morningstar DBRS analyzed each structural configuration (as defined in Schedule IX of the Facility Agreement) as a unique transaction and all configurations (rows) passed the applicable Morningstar DBRS rating stress levels. The Senior Coverage Tests and triggers as well as the Collateral Quality Tests that Morningstar DBRS modelled during its analysis are presented in the tables below.

(1) Senior OC Test: 142.857%
(2) Senior IC Test: 175.00%
(3) Minimum Diversity Score Test: Subject to CQM; 10
(4) Maximum Morningstar DBRS Risk Score Test: 37.50%
(5) Minimum WARR Test: 49%
(6) Minimum WAS Test: Subject to CQM; 6.00%
(7) Minimum WAC Test: Subject to CQM; 8.50%
(8) Maximum WA Life Test: 7.0 years
(9) Advance Rate: Subject to CQM; 70.00%

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 Loans.

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 a Termination Event.

Morningstar DBRS 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 Morningstar DBRS’ “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, Morningstar DBRS provides a credit estimate or internal assessment for each nonfinancial corporate obligor in the portfolio not rated by Morningstar DBRS. Credit estimates are not ratings; rather, they represent a model-driven default probability for each obligor that Morningstar DBRS uses when rating the Advances.

Morningstar DBRS’ credit rating on the Advances addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the Interest at the Interest Rate, the Commitment Fees and principal on the Advances, each as defined in the Facility Agreement.

Morningstar DBRS’ credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations. For example, the credit rating on the Advances does not address any Step-Up Margin, Prepayment Penalty, Costs and Expenses, Break Costs, and/or Indemnified Amounts, as defined in the Facility Agreement.

Morningstar DBRS’ long-term credit ratings provide opinions on risk of default. Morningstar DBRS 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 Morningstar DBRS 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.

The transaction assumptions consider Morningstar DBRS’ 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 Morningstar DBRS’ moderate and adverse pandemic scenarios, which were first published in April 2020.

For more information regarding Morningstar DBRS’ additional adjustment for select industries related to the Coronavirus Disease (COVID-19), please see its May 18, 2020, commentary, “CLO Risk Exposure to the Coronavirus Disease (COVID-19)”: https://www.dbrsmorningstar.com/research/361112.

ENVIRONMENTAL, SOCIAL, AND 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 Morningstar DBRS considers ESG factors within the Morningstar DBRS 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 and the DBRS Morningstar CLO Insight Model (v.1.0.0.0) (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 Morningstar DBRS 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.

Morningstar DBRS 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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Tel. +1 212 806-3277

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

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

-- 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 dbrs.morningstar.com or contact us at [email protected].