Morningstar DBRS Confirms Credit Ratings on the Loans Issued by Cerberus Onshore Levered IV LLC

DBRS, Inc. (Morningstar DBRS) confirmed its AAA (sf) credit ratings and removed the Under Review with Developing Implications status on each of the Class A-R Loans, the Class A-T-1 Loans, and the Class A-T-2 Loans (together, the Loans), issued by Cerberus Onshore Levered IV LLC (the Borrower), pursuant to the Credit Agreement, dated July 16, 2019 (as amended from time to time), among Cerberus Onshore Levered IV LLC as Borrower; Cerberus Levered IV Holdings LLC as Servicer and Retention Provider; the Lenders referred to therein; Natixis Bank, New York Branch as Administrative Agent; and U.S. Bank National Association (rated AA (high) with a Negative trend by Morningstar DBRS) as Collateral Agent and Custodian.

The credit ratings on the Loans address the timely payment of interest (excluding any Excess Interest Amounts and any additional interest payable pursuant to Section 2.5(c)(ii), as defined in the Credit Agreement) and the ultimate payment of principal on or before the Final Maturity Date (as defined in the Credit Agreement).

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 September 16, 2022. The Stated Maturity Date is July 15, 2030.

The Loans are collateralized primarily by a portfolio of U.S. middle-market corporate loans. Cerberus Levered IV Holdings LLC, an affiliate of Cerberus Capital Management II, L.P., will service the Borrower. Morningstar DBRS considers the Servicer to be an acceptable collateralized loan obligation (CLO) servicer.

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

(1) The Credit Agreement dated July 16, 2019, as amended.
(2) The integrity of the transaction structure.
(3) Morningstar DBRS’ assessment of the portfolio quality.
(4) Adequate credit enhancement to withstand projected collateral loss rates under various cash flow stress scenarios.
(5) Morningstar DBRS’ assessment of the origination, servicing, and CLO management capabilities of 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.

Some particular strengths of the transaction are (1) the collateral quality, which consists entirely of first-lien middle-market loans; (2) the adequate diversification of the portfolio of collateral obligations; and (3) the Collateral Manager’s expertise in CLOs and overall approach to selection of Collateral Loans.

Some challenges were identified: (1) the Collateral Loans in the portfolio have experienced some defaults, and (2) the underlying collateral portfolio may be insufficient to redeem the Loans in an Event of Default.

Coverage Tests:
Overcollateralization Ratio: Threshold 137.06%; Current 173.42%
Interest Coverage Ratio: Threshold 125.00%; Current 252.75%

Collateral Quality Tests:
Minimum Weighted Average Spread Test: Threshold 6.25%; Current 6.37%
Minimum Diversity Score Test: Threshold 15; Current 24
Minimum Weighted Average Recovery Rate Test: Threshold 49.40%; Current 50.70%
Maximum Risk Score Test: Threshold 32.79%; Current 27.25%

The transaction is performing according to the contractual requirements of the Credit Agreement. As of January 2, 2024, the Borrower is in compliance with all Coverage and Asset Quality Tests, as well as the Concentration Limitation tests.

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 Collateral Quality Test and Concentration Limitation failures, 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 Loans.

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 ratings 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.

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://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.