Morningstar DBRS Confirms BBB (sf) Credit Rating on the Class A Variable Funding Notes Issued by Parliament Funding III LLC

DBRS, Inc. (Morningstar DBRS) confirmed its BBB (sf) credit rating on the Class A Variable Funding Notes (the Notes) issued by Owl Rock Diversified Advisors LLC (the Borrower).

The credit rating on the Class A Variable Funding Notes issued by Parliament Funding III LLC pursuant to the Indenture dated December 1, 2021 (as amended by the First Supplemental Indenture, dated March 24, 2022; the Second Supplemental Indenture, dated April 27, 2022; Third Supplemental Indenture, dated December 8, 2022; the Fourth Supplemental Indenture, dated May 12, 2023; and the Fifth Supplemental Indenture, dated September 13, 2023) (the Indenture), by and between Parliament Funding III LLC, as Issuer and State Street Bank and Trust Company, as Trustee.

The credit rating on the Notes addresses the ultimate payment of principal and the ultimate payment of interest, including any Deferred Interest, but excluding the post-Event of Default interest rate of 2.00% per annum, on or before the Stated Maturity (each capitalized term as defined and) in accordance with the terms of the Indenture referenced above.

During the continuance of an Event of Default (EOD) (as defined) and in accordance with the terms of the Indenture, the unpaid principal amount of the Notes and overdue interest shall bear a post-EOD interest rate of 2.00% per annum, defined as the Default Rate in the Indenture. Morningstar DBRS’ credit ratings on the Notes does not address the nonpayment risk associated with the 2.00% post-EOD interest.

CREDIT RATING RATIONALE/DESCRIPTION
The credit rating action is a result of Morningstar DBRS’ annual review of the transaction performance by applying the “Global Methodology for Rating CLOs and Corporate CDOs” (the CLO Methodology; November 19, 2024; https://dbrs.morningstar.com/research/443207). The Reinvestment Period end date is December 1, 2026. The Final Maturity Date is December 1, 2033.

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 Notes to withstand projected collateral loss rates under various cash flow stress scenarios.
(4) The credit quality of the underlying collateral and the ability to 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) Morningstar DBRS’ assessment of the origination, servicing, and CLO management capabilities of Owl Rock.
(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).

Morningstar DBRS monitors transaction performance metrics based on the periodicity of the transaction’s reporting. The performance metrics include Collateral Quality Tests, Coverage Tests, Concentration Limitations, and Performing Collateral Par. As of October 3, 2024, the transaction is in compliance with all performance metrics, and the performing collateral par is greater than the reinvestment target par. The current transaction performance is within Morningstar DBRS’ expectations, which supports the credit rating confirmations on the Notes, as per the Level I surveillance analysis in the CLO Methodology. No predictive model is utilized in the Level I surveillance process.

The coverage and collateral quality test reported values and thresholds, respectively, that Morningstar DBRS reviewed are as follows:

Coverage Tests:
Asset Coverage Ratio: actual 135.55%; threshold 123.33%
Maximum Advance Rate: actual 73.77%; threshold 75.00%

Collateral Quality Tests:
Maximum Average DBRS Morningstar Risk Score Test: Subject to CQM; actual 25.80%; threshold 34.50%
Minimum Weighted Average Spread Test: Subject to CQM; actual 5.40%; threshold 2.00%
Minimum Diversity Score: Subject to CQM; actual 43.57; threshold 8.00

Some 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 Collateral Manager’s expertise in CLOs and overall approach to selection of Collateral Obligations. Some challenges were identified: (1) the expected weighted-average credit quality of the underlying obligors may fall below investment grade, and (2) the underlying collateral portfolio may be insufficient to redeem the Notes in an Event of Default.

As of October 3, 2024, the Borrower is in compliance with all Concentration Limitations, Coverage and Collateral Quality Tests. There is one defaulted obligation registered in the underlying portfolio accounting for $1,133,904.09.

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 Notes.

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. The Morningstar DBRS short-term debt rating scale provide 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 US dollars unless otherwise noted.

The principal methodology applicable to the credit rating is the Global Methodology for Rating CLOs and Corporate CDOs (November 19, 2024) https://dbrs.morningstar.com/research/443207.

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.

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

Operational Risk Assessment for Collateralized Loan Obligations (CLOs) and Corporate Collateralized Debt Obligations (CDOs) (August 23, 2024) https://dbrs.morningstar.com/research/438315

Legal Criteria for U.S. Structured Finance (October 28, 2024) https://dbrs.morningstar.com/research/441840

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