Morningstar DBRS Removes the Under Review With Developing Implications Status, Upgrades and Confirms Credit Ratings on the Secured Notes Issued by VCP CLO II, Ltd.

DBRS, Inc. (Morningstar DBRS) removed the Under Review with Developing Implications status and took the following credit rating actions on the Secured Notes issued by VCP CLO II, Ltd. (the Issuer or VCP CLO II) and VCP CLO II, LLC (the Co-Issuer; together with the Issuer, the Co-Issuers):

-- Class A-1 Notes confirmed at AAA (sf)
-- Class A-2 Notes confirmed at AAA (sf)
-- Class B-1 Notes confirmed at AA (high) (sf)
-- Class B-2 Notes confirmed at AA (high) (sf)
-- Class C Notes upgraded to AA (sf) from A (high) (sf)
-- Class D Notes upgraded to A (high) (sf) from A (low) (sf)
-- Class E Notes upgraded to BBB (high) (sf) from BBB (low) (sf)

The credit ratings on the Class A-1 Notes, Class A-2 Notes, Class B-1 Notes, and Class B-2 Notes address the Issuer’s ability to make timely payments of interest and ultimate payments of principal on or before the Stated Maturity Date (as defined in the Indenture). The credit ratings on the Class C Notes, Class D Notes, and Class E Notes address the Issuer’s ability to make ultimate payments of interest and ultimate payments of principal on or before the Stated Maturity Date.

VCP CLO II is a cash flow collateralized loan obligation (CLO) transaction that is backed primarily by a portfolio of U.S. senior secured broadly syndicated corporate loans and is managed by Vista Credit Partners, L.P. Morningstar DBRS considers Vista Credit Partners, L.P. an acceptable CLO manager.

CREDIT RATING RATIONALE
The credit rating actions are a result of Morningstar DBRS’ review of the transaction performance and application of the “Global Methodology for Rating CLOs and Corporate CDOs” (the CLO Methodology), including the Morningstar DBRS CLO Insight Model, released on October 22, 2023. On November 9, 2023, the credit ratings were placed Under Review with Developing Implications to allow Morningstar DBRS to review the credit ratings using the CLO Methodology. The reinvestment period ended on April 15, 2023. The Stated Maturity is April 15, 2031.

The rationale for Morningstar DBRS’ credit rating upgrades on the Class C Notes, the Class D Notes, and Class E Notes is that the static-pool analysis produced significantly lower expected losses, given the greater certainty of the underlying pool of assets. Given a static pool, Morningstar DBRS analyzed the actual obligations in the pool as opposed to a hypothetical pool, which is governed by the covenanted test limitations. The actual pool analysis produced better-than-expected loss results, which warranted the upgrades. In addition, some deleveraging has occurred in the transaction in the past year, which improved overcollateralization (OC) ratios and provided stronger cushion levels.

In addition, the analysis took into consideration the change in the Indenture Trustee and the appointment of Computershare Trust Company, N.A. as the new Indenture Trustee. The appointment of Computershare Trust Company, N.A. as the Trustee on the Transaction will not in and of itself result in a downgrade or discontinuation of the current outstanding credit ratings on the Notes.

In its analysis, Morningstar DBRS 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 Secured Notes to withstand projected collateral loss rates under various cash flow stress scenarios.
(4) Morningstar DBRS’ assessment of the origination, servicing, and CLO management capabilities of Vista Credit Partners, L.P. as the Collateral Manager.
(5) The legal structure as well as legal opinions addressing certain matters of the Issuer and the consistency with Morningstar DBRS’ “Legal Criteria for U.S. Structured Finance” methodology.

Some particular strengths of the transaction are (1) collateral quality that consists of at least 90% senior-secured floating-rate broadly syndicated loans and (2) the strong diversification of underlying obligations. Some challenges were identified as follows: (1) the underlying collateral portfolio may be insufficient to redeem the loans in an event of default.

To account for a static pool, Morningstar DBRS analyzed the actual obligations in the pool as reported in the trustee report on January 3, 2024, which took into account the failing Weighted Average Life Test, the sixth-largest single obligor limit breach, as well the CCC concentration limit breach. The Coverage Tests that Morningstar DBRS modeled in its analysis are presented below.

Coverage Tests:
Class A/B OC Ratio: Threshold 134.92%; Current 145.96%
Class C OC Ratio: Threshold 123.57%; Current 214.94%
Class D OC Ratio: Threshold 119%; Current 124.80%
Class E OC Ratio: Threshold 114.54%; Current 118.55%

Class A/B Interest Coverage (IC) Ratio: Threshold 120.00%; Current 214.94%
Class C IC Ratio: Threshold 115.00%; Current 187.79%
Class D IC Ratio: Threshold 110.00%; Current 173.18%

Collateral Quality Tests:
Minimum Floating Spread Test: Threshold 4.00%; Current 4.16%
Maximum Diversity Score: Threshold 31; Current 39

As of January 3, 2024, the transaction is failing three Collateral Quality Tests: the Weighted Average Life Test, the sixth-largest single obligor limitation, and the maximum allocation toward CCC obligations. Failures of this nature are expected to be observed in static transactions well into the amortization period. Morningstar DBRS considered these failures while analyzing the transaction performance via the static pool (Current Profile) analysis. Further, Morningstar DBRS analyzed each loan in the pool separately by inputting its credit rating, seniority, country of origin, and industry, among others, into the Morningstar DBRS CLO Insight Model.

Morningstar DBRS analyzed the transaction using the Morningstar DBRS CLO Insight Model and its proprietary cash flow engine, which incorporated assumptions regarding principal amortization, principal prepayment, amount of interest generated, principal prepayments, default timings, and recovery rates, among other credit considerations referenced in Morningstar DBRS’ “Global Methodology for Rating CLOs and Corporate CDOs” (October 22, 2023; https://dbrs.morningstar.com/research/422269).

The transaction is performing according to the contractual requirements of the Indenture. Model-based analysis, which had incorporated the above-mentioned failures, produced satisfactory results. Considering the transaction performance, as well as its legal aspects and structure, Morningstar DBRS upgraded and confirmed its credit ratings on the above-mentioned Secured Notes issued by VCP CLO II.

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://dbrs.morningstar.com/research/425506). These baseline macroeconomic scenarios replace Morningstar DBRS’ moderate and adverse coronavirus pandemic scenarios, which were first published in April 2020.

For more information regarding Morningstar DBRS’ 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)” at https://dbrs.morningstar.com/research/361112.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors 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 Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030 (January 23, 2024).

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 and the Morningstar DBRS CLO Insight Model (version 1.0.1.0) (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 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.

Please, see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed credit ratings:

The last credit rating action on this transaction took place on November 9, 2023.

For further information on Morningstar DBRS 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 Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Oxana Rhybak, Vice President, U.S. Structured Credit
Rating Committee Chair: Glen Leppert, Senior Vice President, U.S. Structured Credit
Initial Rating Date: February 5, 2021

DBRS, Inc.
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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://dbrs.morningstar.com/about/methodologies.

-- Operational Risk Assessment for Collateralized Loan Obligations (CLOs) and Corporate Collateralized Debt Obligations (CDOs) (September 14, 2023), https://dbrs.morningstar.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://dbrs.morningstar.com/research/425081

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.