Morningstar DBRS Confirms Its Credit Ratings on the Revolving Advances and Term Advances Issued by Cerberus Redwood Levered A II LLC

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on the Revolving Advances and Term Advances (together, the Advances) issued by Cerberus Redwood Levered A II LLC, pursuant to the Credit and Security Agreement (the CSA), dated as of April 13, 2023, as amended by Amendment No. 1 to the CSA, dated as of September 29, 2023, Amendment No. 2 to the CSA, dated as of November 28, 2023 and Amendment No. 3 to the CSA, dated as of June 10, 2024 (the Amendment), among Cerberus Redwood Levered A II LLC, as the Borrower; Cerberus Redwood Levered A Holdings II LLC, as the Servicer; Société Générale, as the Administrative Agent; Computershare Trust Company, N.A. (rated BBB with a Stable trend by Morningstar DBRS), as the Collateral Agent and Custodian; and the Lenders party thereto:

-- Revolving Advances at AA (sf)
-- Term Advances at AA (sf)

The credit ratings on the Advances address the timely payments of interest (excluding any Excess Interest Amounts, as defined in the CSA) and the ultimate repayments of principal on or before the Final Maturity Date (as defined in the CSA).

CREDIT RATING RATIONALE/DESCRIPTION
These credit rating actions are a result of Morningstar DBRS surveillance review of the Amendment, which included a change to the Total Commitment amounts of the Advances, extension of the Stated Maturity Date to June 10, 2032 from April 13, 2031, and reduction of the Facility Margin Level, among other changes.

Cerberus Redwood Levered A II 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. The Reinvestment Period is scheduled to end on June 10, 2026. The Final Maturity Date is June 10, 2032.

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) The credit quality of the underlying collateral and the ability of the transaction to reinvest Principal Proceeds into new Collateral Obligations, subject to the Eligibility Criteria, which include testing the Concentration Limitations, Collateral Quality Tests, and Coverage Tests.
(5) Assessment of the CLO management capabilities of Cerberus Redwood Levered A Holdings II 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 Legal Criteria).

The transaction has a dynamic structural configuration that 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 (DScore), the following metrics are selected accordingly from the applicable row of the CQM: Morningstar DBRS WA Risk Score, Advance Rate, Weighted-Average Spread (WAS), Weighted-Average Recovery Rate (WARR) and Overcollateralization Test. Morningstar DBRS analyzed each structural configuration (as defined in Schedule 7 of the CSA) as a unique transaction and all configurations (rows) passed the applicable Morningstar DBRS rating stress levels. The 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) Overcollateralization Test: Subject to CQM; 143.85% - 190.00%
(2) Interest Coverage Test: 110.00%
(3) Minimum Weighted-Average Spread Test: Subject to CQM; 5.00%
(5) Minimum Diversity Score Test: Subject to CQM; 15
(6) Minimum Weighted-Average Morningstar DBRS Recovery Rate Test: Subject to CQM; 46.00%
(7) Minimum Weighted-Average Coupon Test: 8.00%
(8) Maximum Morningstar DBRS Risk Score Test: Subject to CQM; 41.00%

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 Collateral Obligations.

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 an Event of Default.

Morningstar DBRS modeled 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, 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 confirmations 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.

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 (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 the Global Methodology for Rating CLOs and Corporate CDOs and the CLO Insight Model v1.0.1.0 (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 not 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.

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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 (September 14, 2023)
https://dbrs.morningstar.com/research/420608

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

Legal Criteria for U.S. Structured Finance (April 15, 2024)
https://dbrs.morningstar.com/research/431205

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