Morningstar DBRS Upgrades Credit Ratings and Removes the Under Review With Developing Implications Status on Notes Representing Advances to Cerberus SWC Levered II LLC

DBRS, Inc. (Morningstar DBRS) upgraded to AAA (sf) from AA (high) (sf) its credit rating and removed the Under Review with Developing Implications status on the Notes representing the Advances (the Advances) of Cerberus SWC Levered II LLC, pursuant to the Second Amended and Restated Loan, Security and Servicing Agreement dated November 20, 2019, as amended by the Second Amendment to the Second Amended and Restated Loan, Security and Servicing Agreement, dated December 23, 2020, and the Third Amendment to the Second Amended and Restated Loan, Security and Servicing Agreement, dated November 18, 2022 (the Loan Agreement), among Cerberus SWC Levered II LLC as the Borrower; Cerberus SWC Levered Holdings II LP as the Servicer; Capital One, National Association (rated “A” with a Stable trend by Morningstar DBRS) as the Administrative Agent, Hedge Counterparty, Swingline Lender, and Arranger; U.S. Bank Trust Company, National Association (rated AA (high) with a Negative trend by Morningstar DBRS) as the Collateral Custodian; U.S. Bank National Association (rated AA (high) with a Negative trend by Morningstar DBRS) as the Document Custodian; and each Lender from time to time party thereto.

The credit rating on the Advances addresses the timely payment of Interest, other than Interest attributable to Excess Interest Amounts (as defined in the Loan Agreement) and the ultimate payment of the aggregate principal amount of all Advances outstanding on or before the Facility Maturity Date (as defined in the Loan Agreement).

The Advances are collateralized primarily by a portfolio of U.S. middle-market corporate loans. The servicer for Cerberus SWC Levered II LLC is Cerberus SWC Levered Holdings II LP, an affiliate of Cerberus Capital Management II, L.P. Morningstar DBRS considers Cerberus SWC Levered Holdings II LP an acceptable collateralized loan obligation (CLO) servicer.

CREDIT RATING RATIONALE/DESCRIPTION
The credit rating action is 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, and updated on February 23, 2024. On November 9, 2023, the credit rating was placed Under Review with Developing Implications to allow Morningstar DBRS to review the credit rating using the CLO Methodology. The Revolving Period ended on February 20, 2023. The Facility Maturity Date is November 20, 2026.

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 Advances 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 Cerberus SWC Levered Holdings II LP, an affiliate of Cerberus Capital Management II, L.P.
(5) 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 Legal Criteria).

Some particular strengths of the transaction are (1) the collateral quality, which consists primarily of senior-secured floating-rate middle market 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 credit quality of the underlying obligors may fall below investment grade and (2) the underlying collateral portfolio may be insufficient to redeem the Advances in an Event of Default.

The transaction entered its amortization period on February 20, 2023, which assumes limited reinvestment abilities. To account for the static pool, Morningstar DBRS analyzed the actual obligations in the pool as reported in the trustee report on January 31, 2024.

As of January 31, 2024, the transaction is failing its Concentration Limitation for Long-Dated Obligations (39.75% vs a maximum of 35.00%). Failures of this nature are expected to be observed in static transactions well into the amortization period. Morningstar DBRS considered this failure while analyzing the transaction performance to account for the static pool. 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. The Coverage Tests and Collateral Quality Tests that Morningstar DBRS modeled in its analysis are presented below:

Coverage Tests
Overcollateralization (OC) Ratio: Current 206.72%; Threshold 145.90%
Interest Coverage (IC) Ratio: Current 254.19%; Threshold 150%

Collateral Quality Tests
Minimum Diversity Score Test: Current 43; Threshold 30
Maximum Morningstar DBRS Risk Score Test: Current 26.90; Threshold 32.25
Minimum Weighted-Average Morningstar DBRS Recovery Rate Test: Current 53.60%; Threshold 47.62%
Minimum Weighted-Average Spread Test: Current 6.29%; Threshold 5.75%

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 23, 2024; https://dbrs.morningstar.com/research/428544).

Model-based analysis, which had incorporated the above-mentioned Collateral Quality Test and Concentration Limitation failures, produced satisfactory results. Considering the transaction performance, as well as its legal aspects and structure, Morningstar DBRS upgraded its credit ratings on the Advances.

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 (January 23, 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 rating is Global Methodology for Rating CLOs and Corporate CDOs and the CLO Insight Model version 1.0.1.0 (February 23, 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.

This credit rating is 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 rating on the Advances 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: Glen Leppert, Senior Vice President, Sector Lead
Initial Rating Date: November 20, 2019

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

Legal Criteria for U.S. Structured Finance (December 7, 2023), https://dbrs.morningstar.com/research/425081

Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 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.