Morningstar DBRS Confirms Credit Rating on GLQC II D.A.C. Following Amendments

DBRS Ratings GmbH (Morningstar DBRS) confirmed its AA (low) credit rating on the EUR 2,500,000,000 Notes due 2033 (the Notes) issued by GLQC II D.A.C. (GLQC II or the Issuer), in the context of certain amendments to the transaction documents (the Amendments). The credit rating addresses the timely payment of scheduled interest and the ultimate repayment of principal by the legal maturity date in September 2033.

GLQC II is a perpetual investment vehicle ultimately owned and managed by The Goldman Sachs Group, Inc. (GS), which invests primarily in senior secured covenant-lite loans, bonds and unsecured loans to high-yield corporate borrowers, predominantly across Europe. The Issuer is managed by a subsidiary of GS, for which Morningstar DBRS has a very strong fund manager assessment. The Issuer also benefits from a guarantee provided by GS (Long-Term Issuer Rating of A (high) with a Stable trend) for the timely and complete payment of all current and future liabilities of GLQC II with respect to obligations arising under the Notes (the GS Guarantee).

Some of the key Amendments executed on 22 April 2024 include:
-- An increase in the Notes margin to 2.5% from 0.78%;
-- A country concentration limit capping at 15% the collateral value of the assets whose obligor is incorporated outside of the European Union, U.S. or U.K.;
-- An industry concentration limit capping at 15% the collateral value of the assets whose obligor's principal business activity is in a single specified industry (subject to a permitted industry concentration of 25% each for two single specified industries);
-- A non-corporate concentration limit capping at 20% the collateral value of the assets whose obligor is a non-corporate, financial entity or financial institution;
-- A subordinated debt concentration limit capping at 20% the collateral value of the assets which are expressed to constitute mezzanine or subordinate debt;
-- An asset concentration limit capping at 2.5% the collateral value of a single asset (subject to permitted asset concentration limits of (i) 5% each for up to eight single assets and (ii) 10% for one single asset);
-- An eligibility criteria excluding from the eligible portfolio: (i) defaulted assets, (ii) assets whose obligor is an affiliate of the Issuer and (iii) assets expressed to constitute a real estate infrastructure or private equity asset.

Additionally, on 6 March 2024 the Issuer partially redeemed the Notes by EUR 300,000,000. The Notes outstanding principal balance is currently equal to EUR 2,200,000,000. To finance the partial redemption, the Issuer borrowed liquidity under the Multi-Currency Loan (MCL), a credit facility granted by an entity part of the GS group and structurally subordinated to the Notes. The Issuer currently holds EUR 388.4 million of cash in its accounts.

As GLQC II's liabilities with respect to the Notes are guaranteed by GS, Morningstar DBRS continues to apply Appendix 3 of its "Rating European Structured Finance Transactions Methodology", which describes Morningstar DBRS' approach to rating transactions when there are multiple independent sources of cash flows that are each sufficient for the timely repayment of interest and the full repayment of principal of the rated securities (Dual-Recourse Securities). Morningstar DBRS defines the Issuer's assets and the GS Guarantee as the two sources of cash flows.

Morningstar DBRS used its CLO Insight Model to analyse the eligible portfolio based on investment-level characteristics that drive assumptions around probability of default and recoveries for each asset. As of June 2024, the eligible portfolio consisted of 162 investments to 71 borrowers. To determine the credit quality of the current eligible portfolio, Morningstar DBRS updated its previously assigned credit estimates for the majority of the assets (with a small bucket benefitting from public credit ratings). The Morningstar DBRS Weighted-Average Risk Score (WARS) for the assets with either an assigned credit estimate (including credit estimates currently being refreshed) or benefitting from a public credit rating (combined representing 89.0% of the portfolio) stands at 29.2%, corresponding to an average credit quality between 'B' and B (low), and slightly improving from 29.5% as of the Initial Rating Date. Morningstar DBRS considered a credit quality of CCC (high) for the assets with no assigned credit estimate and not benefitting from a public credit rating, leading to an aggregate WARS of 31.3%, in line with a B (low) quality, representing an improvement from 34.6% as of the Initial Rating Date. These characteristics, together with the asset manager's track record and investment strategy, are aggregated to determine the applicable Asset Coverage Ratio (ACR) and Advance Rate (AR) ranges, which continue to align with a BBB-range assessment. From a credit rating perspective, the Amendments were largely neutral, as Morningstar DBRS continues to conduct its analysis based on the asset manager's indication to maintain the AR at or below 66%, consistently with a BBB-range assessment.

Based on the comparison between the probabilities of default of the two credits, Morningstar DBRS continues to consider the Issuer's assets to be the lower-rated credit and the GS Guarantee to be the higher-rated credit. According to Appendix 3 of the "Rating European Structured Finance Transactions Methodology", the amount of uplift starts from the higher-rated credit and is a function of the lower credit rating and the degree of overlap in the assets' drivers of default risk. Based on a high overlap between the two credits, Morningstar DBRS continues to assign an uplift of one notch on top of the higher-rated credit.

The eligible portfolio currently accounts for USD 3.2 billion, with the top three borrower exposures representing 6.5%, 5.8%, and 4.1% of the pool, respectively. The current pool is geographically well diversified, with the top three exposures by country being the UK (29.3%), Germany (18.0%), and France (11.3%). The assets are also well diversified across industries, with the top three industries (based on Morningstar DBRS industry classification) representing Business Services (18.1%), Software (18.0%), and Healthcare Providers and Services (13.9%). The current weighted-average tenor of the eligible portfolio is 3.8 years, while the current seniority breakdown based on Morningstar DBRS' Corporate Recovery Rates classification is: Senior Secured Covenant-Lite Loans (76.2%), Senior Secured Bonds (2.8%), Second Lien and Senior Unsecured (6.8%) and Subordinate (14.1%). The Issuer continues to be exposed to foreign exchange (FX) risk because of assets denominated in several currencies, with the top three being euros (52.9%), USD (21.6%), and British pound (21.3%). The MCL's purpose is to fund investments in different currencies and therefore constitutes a partial mitigant to FX risk.

ENVIRONMENTAL, SOCIAL, 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 Factors in Credit Ratings at https://dbrs.morningstar.com/research/437781 (13 August 2024).

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies are the Global Methodology for Rating Debt Issued by Investment Funds (1 May 2024), https://dbrs.morningstar.com/research/432214 and the Rating European Structured Finance Transactions Methodology (Appendix 3: Dual-Recourse Securities) (25 June 2024), https://dbrs.morningstar.com/research/434970 .

In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024), https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The following methodologies have also been applied:
-- Global Methodology for Rating CLOs and Corporate CDOs (23 February 2024) and CLO Insight Model version 1.0.1.2, https://dbrs.morningstar.com/research/428544
-- Morningstar DBRS Global Criteria: Corporate Credit Estimates (19 July 2024),
https://dbrs.morningstar.com/research/436498.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

The sources of information used for this credit rating include Morningstar, Inc. and company documents.

Morningstar DBRS received the following data and information:
-- Portfolio information as at June 2024; and
-- Executed Amendments documents

Morningstar DBRS considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

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.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/437912.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Daniele Canestrari, Assistant Vice President
Rating Committee Chair: Carlos Silva, Senior Vice President
Initial Rating Date: 6 November 2023
Last Rating Date: 6 November 2023

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