Morningstar DBRS Confirms Credit Ratings and Removes the Under Review With Developing Implications Status on the Class A-1 Notes and the Class A Loans Issued by Cerberus Loan Funding XXIV L.P.

DBRS, Inc. (Morningstar DBRS) confirmed its credit rating of AAA (sf) and Removed from Under Review with Developing Implications status on the Class A-1 Senior Secured Floating-Rate Notes (the Class A-1 Notes or the Notes) issued by Cerberus Loan Funding XXIV L.P. (Cerberus or the Issuer) pursuant to the Indenture dated August 7, 2018, among Cerberus, as Issuer; Cerberus LFGP XXIV, LLC, as General Partner; Cerberus Co-Issuer XXIV LLC, as Co-Issuer; Cerberus Business Finance, LLC (CBF), as Servicer; and Wells Fargo Bank, N.A. (rated AA with a Stable trend by Morningstar DBRS), as Trustee. Morningstar DBRS also confirmed its rating of AAA (sf) and Removed from Under Review with Developing Implications status on the Class A Senior Secured Loans (the Class A Loans or the Loans) issued by Cerberus as the Borrower, pursuant to the Class A Loan Agreement, dated August 7, 2018, among the Borrower, Cerberus Co-Issuer XXIV LLC as the Co-Borrower, the General Partner, the Trustee, and each of the Class A Lenders hereto.

The credit ratings on the Notes and the Loans (together, the Debt) address the timely payments of interest and the ultimate payments of principal on or before the Stated Maturity (as defined in the Indenture referred to above).

The debt issued by Cerberus is collateralized primarily by a portfolio of U.S. middle-market (MM) corporate loans. Cerberus is managed by CBF as Servicer. Morningstar DBRS considers CBF an acceptable collateralized loan obligation (CLO) manager.

CREDIT RATING RATIONALE/DESCRIPTION
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, initially 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 July 15, 2022. The Stated Maturity Date is July 15, 2030.

In its analysis, Morningstar DBRS considered the following aspects of the transaction:

(1) The Indenture, dated August 7, 2018.
(2) The Class A Loan Agreement, dated August 7, 2018.
(3) The integrity of the transaction structure.
(4) Morningstar DBRS’ assessment of the portfolio quality.
(5) Adequate credit enhancement to withstand projected collateral loss rates under various cash flow stress scenarios.
(6) Morningstar DBRS’ assessment of the origination, servicing, and CLO management capabilities of CBF.

Some particular strengths of the transaction are (1) the collateral quality, which consists primarily of senior-secured floating-rate MM loans and (2) the collateral manager’s expertise in CLOs and overall approach to selection of collateral loans. Some challenges identified were (1) the weighted-average (WA) credit quality of the underlying obligors may fall below investment grade and (2) the underlying collateral portfolio may be insufficient to redeem the debt 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 2, 2024, which took into account the reported First Lien Loans, cash and Eligible Investments concentration limit breach (72.9% vs the minimum concentration of 80%). The Coverage Tests and Collateral Quality Tests that Morningstar DBRS modeled in its analysis are presented below.

Coverage Tests
Class A/B Overcollateralization (OC) Ratio: Threshold 154.40%; Current 178.07%
Class C OC Ratio: Threshold 133.00%; Current 140.68%
Class D OC Ratio: Threshold 125.70%; Current 126.95%

Class A/B Interest Coverage (IC) Ratio: Threshold 165.00%; Current 308.24%
Class C IC Ratio: Threshold 135.00%; Current 235.54%
Class D IC Ratio: Threshold 125.00%; Current 206.34%

Collateral Quality Tests
Minimum Diversity Score Test: Threshold 28; Current 28
Maximum Morningstar DBRS Risk Score Test: Threshold 54.56%; Current 29.73%
Minimum Weighted-Average Morningstar DBRS Recovery Rate Test: Threshold 39.63%; Current 49.99%
Minimum Weighted-Average Spread (WAS) Test: Threshold 6.25%; Current 6.68%

Given a static pool, Morningstar DBRS analyzed the actual obligations in the pool as opposed to a hypothetical pool, governed by the covenanted test limitations. 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. The rating confirmations are a result of the debt performing within Morningstar DBRS’ expectations.

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” (February 24, 2024; https://dbrs.morningstar.com/research/428544).

Model-based analysis, which had incorporated the above-mentioned concentration limitation breach, produced satisfactory results. Considering the transaction performance, as well as its legal aspects and structure, Morningstar DBRS confirmed its credit ratings on the above-mentioned debt.

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, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a relevant or significant 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 (23 January 2024) https://dbrs.morningstar.com/research/427030.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology applicable to the credit ratings is Global Methodology for Rating CLOs and Corporate CDOs and the CLO Insight Model version 1.0.1.0 (23 February, 2024) https://dbrs.morningstar.com/research/428544

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 issuer took place on November 9, 2023, when Morningstar DBRS placed its credit ratings on the debt Under Review with Developing Implications.

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, Sector Lead
Rating Committee Chair: Jerry van Koolbergen, Managing Director
Initial Rating Date: June 29, 2018

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 CLOs and CDOs (14 September 2023)
https://dbrs.morningstar.com/research/420608

Legal Criteria for U.S. Structured Finance (07 December 2023)
https://dbrs.morningstar.com/research/425081

Interest Rate Stresses for U.S. Structured Finance Transactions (26 February 2024)
https://dbrs.morningstar.com/research/428623

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