Morningstar DBRS Confirms Credit Rating on BlackRock Shasta Senior Loan Fund VII, LLC Class A-1 L-R Loans

DBRS, Inc. (Morningstar DBRS) confirmed its AAA (sf) credit rating on the Class A-1 L-R Loans (f/k/a the Class A-1 L Loans) issued by BlackRock Shasta Senior Loan Fund VII, LLC pursuant to the Class A-1 L Credit Agreement, dated December 8, 2021, as amended by the Amended and Restated Class A-1 L-R Credit Agreement, dated May 15, 2024, as further amended by the Second Amended and Restated Class A-1 L-R Credit Agreement, dated August 22, 2024 (the Amended Credit Agreement), among BlackRock Shasta Senior Loan Fund VII, LLC (as Borrower); Capital One, N.A. (as Lender and Administrative Agent); U.S. Bank Trust Company, National Association (as Collateral Agent); and various financial institutions and other individuals from time to time (as Lenders) and pursuant to the terms and conditions of the Third Amendment to the Note Purchase and Security Agreement, dated December 8, 2021, as amended by the Amended and Restated Note Purchase and Security Agreement, dated May 15, 2024, as further amended by the Second Amended and Restated Note Purchase and Security Agreement, dated August 22, 2024 (the Amended NPSA), among the Borrower (as Issuer), the Collateral Agent (as Collateral Agent, Collateral Administrator, Information Agent, and Note Agent), U.S. Bank National Association (as Custodian and Document Custodian), and the purchasers referred to therein.

The credit rating on the Class A-1 L-R Loans addresses the timely payment of interest (excluding the additional interest payable at the Post Default Rate, as defined in the Amended NPSA) and the ultimate payment of principal on or before the Stated Maturity in August 2035, in accordance with the terms and conditions and pursuant to the Amended NPSA and the Amended Credit Agreement.

CREDIT RATING RATIONALE/DESCRIPTION
The credit rating action is a result of Morningstar DBRS' review of the Amended Credit Agreement and the Amended NPSA, each dated August 22, 2024 (the Amendments), which reduced the Total Commitment size of the Class A-1 L-R Loans, amended the Maximum Advance Rate, increased the Class A-1 Overcollateralization Ratio Test (as defined in the Amended NPSA), and extended the Reinvestment Period and the Stated Maturity of the transaction, among other changes. The Reinvestment Period end date is August 22, 2027. The Stated Maturity is August 22, 2035.

In its review, 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 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.
(4) Morningstar DBRS' assessment of the origination, servicing, and CLO management capabilities of BlackRock Capital Investment Advisors, LLC.
(5) The legal structure as well as legal opinions addressing certain matters of the Issuer and the consistency with the Morningstar DBRS' Legal Criteria for U.S. Structured Finance methodology.

The transaction has a dynamic structural configuration which 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, the following metrics are selected accordingly from the applicable row of the CQM: Weighted-Average Risk Score, Weighted-Average Spread, and Recovery Rate. Morningstar DBRS analyzed the structural configuration 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 modeled during its analysis are presented below.

Collateral Quality Tests
Minimum Weighted Average Spread: Subject to Collateral Quality Matrix; 4.50%
Minimum Weighted Average Coupon: 6.00%
Maximum Risk Score: Subject to Collateral Quality Matrix; 43.25%
Minimum Weighted Average Recovery Rate Test: Subject to Collateral Quality Matrix; 43.94%
Minimum Diversity Score Test; Subject to Collateral Quality Matrix; 15

Coverage Tests
Class A-1 Overcollateralization Ratio: 285.71%
Class A-1 Interest Coverage: 150.00%

Some particular strengths of the transaction are (1) the collateral quality, which consists mostly of senior-secured floating-rate Middle Market loans and (2) the adequate diversification of the portfolio of collateral obligations (current DScore of 47.30 vs the required level of 15). Some challenges were identified as follows: (1) the weighted-average credit quality of the underlying obligors may fall below investment grade and may not have public ratings and (2) the underlying collateral portfolio may be insufficient to redeem the Class A-1 L-R Loans in an Event of Default.

As of July 12, 2024, one collateral quality test is failing: the Minimum Weighted Average Coupon test (current 4.51% vs required 6.0%). The transaction is also failing three concentration limitation tests: Obligors with an EBITDA of less than $20M (current 25.2% vs limit 25.0%); Partial PIK Loans (current 5.3% vs limit 5.0%); and CCC Collateral Obligations (current 33.6% vs limit 25.0%) These failures were considered in the analysis. One loan with a principal balance of $5.02 million defaulted to date in the portfolio. The average quality of the portfolio equates to a Risk Score of 42.60%.

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) and CLO Insight Model v. 1.0.1.2.

The model-based analysis produced satisfactory results. Considering the amendment terms, as well as the transaction performance, Morningstar DBRS confirmed the above-mentioned credit rating on the Class A-1 L-R Loans.

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 is used in assigning ratings to a facility.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 (August 13, 2024; https://dbrs.morningstar.com/research/437781).

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 (February 23, 2024; https://dbrs.morningstar.com/research/428544) and the CLO Insight Model v1.0.1.2.

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.

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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.