Morningstar DBRS Assigns Provisional Credit Rating to the Advances Issued by Cerberus EU Levered V LLC

DBRS, Inc. (Morningstar DBRS) assigned the following provisional credit rating to the Advances issued by Cerberus EU Levered V LLC, pursuant to the Loan, Security and Servicing Agreement (Loan Agreement) dated as of October 2, 2024, among Cerberus EU Levered V LLC, as the Borrower; Cerberus EU Levered V Holdings LP, as the Servicer and the Transferor; Capital One, National Association, as the Administrative Agent, Lender, and Arranger; U.S. Bank Trust Company, National Association, as the Collateral Custodian; and the Lenders party thereto:

-- The Advances rated (P) AA (sf)

The provisional credit rating on the Advances addresses the timely payments of interest (excluding any Excess Interest Amounts, Increased Costs, Breakage Costs, Costs and Expenses, and/or Indemnified Amounts, as defined in the Loan Agreement referred to above) and the ultimate payment of principal on or before the Facility Maturity Date (as defined in the Loan Agreement referred to above).

CREDIT RATING RATIONALE/DESCRIPTION
Cerberus EU Levered V 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 Scheduled Revolving Period End Date is October 2, 2027. The Facility Maturity Date is October 2, 2031.

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 EU Levered V Holdings LP, 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 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, the following metrics are selected accordingly from the applicable row of the CQM: Maximum DBRS Risk Score Test, Minimum Weighted-Average Spread Test, and Minimum Weighted-Average DBRS Recovery Rate Test. Morningstar DBRS analyzed each structural configuration (as defined in Schedule VIII of the Loan Agreement) 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 Ratio Test: 142.9%
(2) Total Interest Coverage Ratio Test: 150.0%
(3) Minimum Weighted-Average Spread Test: Subject to CQM; 4.75%
(4) Maximum Weighted-Average Life Test: 7.0 years
(5) Minimum Diversity Score Test: Subject to CQM; 8
(6) Minimum Weighted Average DBRS Recovery Rate Test: Subject to CQM; 39.97%
(7) Minimum Weighted Average Coupon Test: 6.50%
(8) Maximum DBRS Risk Score Test: Subject to CQM; 68.00%

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 Eligible Loans.

Some challenges were identified: (1) the expected weighted-average 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 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" (September 19, 2024; https://dbrs.morningstar.com/research/439759) and CLO Insight Model v. 1.0.1.2.

Model-based analysis, which had incorporated the above-mentioned amendments and the addition of rows to the collateral quality matrix, produced satisfactory results. Considering the analysis, as well as the transaction's legal aspects and structure, Morningstar DBRS assigned its provisional credit rating 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.

Morningstar DBRS' credit rating on the Advances addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the interest (excluding any Excess Interest Amounts and the principal due on the Advances.

Morningstar DBRS' credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. For example, Excess Interest Amounts, Increased Costs, Breakage Costs, Costs and Expenses, and/or Indemnified Amounts.

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. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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 (September 19, 2024; https://dbrs.morningstar.com/research/439759) and CLO Insight Model v. 1.0.1.2.

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.

A provisional credit rating is not a final credit rating with respect to the above-mentioned Advances and may change or be different than the final credit rating assigned or may be discontinued. The assignment of a final credit rating on the above-mentioned Advances is subject to receipt by Morningstar DBRS of all data and/or information and final documentation that Morningstar DBRS deems necessary to finalize the 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 Collateralized Loan Obligations (CLOs) and Corporate Collateralized Debt Obligations (CDOs) (August 23, 2024; https://dbrs.morningstar.com/research/438315)

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.