DBRS Morningstar Finalizes Provisional Ratings on the Secured Notes of BlackRock DLF IX CLO 2021-2, LLC

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the Class A-1 Notes, Class A-2 Notes, Class B Notes, Class C Notes, Class D Notes, Class E Notes, and Class W Notes (together, the Secured Notes) issued by BlackRock DLF IX CLO 2021-2, LLC, pursuant to the Note Purchase and Security Agreement (the NPSA) dated as of May 20, 2021, and amended on August 2, 2022 (the Amendment), among BlackRock DLF IX CLO 2021-2, LLC as the Issuer; U.S. Bank National Association (rated AA (high) with a Stable trend by DBRS Morningstar) as the Collateral Agent, Custodian, Document Custodian, Collateral Administrator, Information Agent, and Note Agent; and the Purchasers referred to therein as follows:

-- Class A-1 Notes at AAA (sf)
-- Class A-2 Notes at AA (high) (sf)
-- Class B Notes at A (high) (sf)
-- Class C Notes at A (sf)
-- Class D Notes at BBB (sf)
-- Class E Notes at BB (sf)
-- Class W Notes at B (sf)

The ratings on the Class A-1 Notes and the Class A-2 Notes address the timely payment of interest (excluding the additional interest payable at the Post-Default Rate, as defined in the NPSA) and the ultimate payment of principal on or before the Stated Maturity of May 20, 2035.

The ratings on the Class B Notes, the Class C Notes, the Class D Notes, the Class E Notes, and the Class W Notes address the ultimate payment of interest (including any Deferred Interest but excluding the additional interest payable at Post-Default Rate, as defined in the NPSA) and the ultimate payment of principal on or before the Stated Maturity of May 20, 2035. The Class W Notes have a fixed-rate coupon that is lower than the spread/coupon of some of the more-senior Secured Notes, including the Class E Notes, and could therefore be considered below market rate.

The Secured Notes are collateralized primarily by a portfolio of U.S. senior secured middle-market (MM) corporate loans, which is managed by BlackRock Capital Investment Advisors, LLC (BlackRock Capital or BCIA) as the Collateral Manager. BlackRock Capital is a wholly owned subsidiary of BlackRock, Inc. DBRS Morningstar considers BCIA an acceptable collateralized loan obligation (CLO) manager.

RATING RATIONALE/DESCRIPTION
The rating action is a result of DBRS Morningstar’s surveillance review of the transaction. DBRS Morningstar finalized its provisional ratings on the Secured Notes, as the Phase II Funding Date has occurred and the transaction is in compliance with the Eligibility Criteria (as defined in the NPSA). The current transaction performance is also within DBRS Morningstar’s expectation. The Stated Maturity is May 20, 2035. The Reinvestment Period ends on May 20, 2027.

In its analysis, DBRS Morningstar 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 Secured Notes to withstand projected collateral loss rates under various cash flow stress scenarios.
(4) The credit quality of the underlying collateral, which consists primarily of senior-secured floating-rate MM loans, 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) DBRS Morningstar’s assessment of the origination, servicing, and CLO management capabilities of BCIA.
(6) The legal structure as well as legal opinions addressing certain matters of the Issuer and the consistency with DBRS
Morningstar’s “Legal Criteria for U.S. Structured Finance” (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, as defined in Schedule G of the NPSA). Depending on a given Diversity Score (DScore), the following metrics are selected accordingly from the applicable row of the CQM: DBRS Morningstar Risk Score, Advance Rate, Weighted-Average (WA) Recovery Rate, and WA Spread Level. DBRS Morningstar analyzed each structural configuration (row) as a unique transaction, and all configurations passed the applicable DBRS Morningstar rating stress levels. The Coverage Tests and triggers as well as the Collateral Quality Tests that DBRS Morningstar modeled in its base-case analysis are presented below.

DBRS Morningstar models tests and triggers as defined in the NPSA:

Class A OC Ratio 143.97
Class B OC Ratio 135.27
Class C OC Ratio 128.66
Class D OC Ratio 119.22
Class E OC Ratio 110.75

Class A IC Ratio 150.00
Class B IC Ratio 140.00
Class C IC Ratio 130.00
Class D IC Ratio 120.00
Class E IC Ratio 110.00
Class W IC Ratio 100.00

Collateral Quality Tests:

Minimum WA Spread Test: 5.00%, Subject to the Collateral Quality Matrix
Minimum WA Coupon Test: 6.0%
Maximum DBRS Morningstar Risk Score Test: 59.25, Subject to the Collateral Quality Matrix
Minimum Diversity Score Test: 23, Subject to the Collateral Quality Matrix
Minimum WA DBRS Morningstar Recovery Rate Test: 44.30%, Subject to the Collateral Quality Matrix
Maximum WA Life Test: 7.0 years minus the product of (A) 0.25 and (B) the number of Quarterly Payment Dates that have occurred since the fifth anniversary of the Closing Date
Maximum Advance Rate: 87.13%, Subject to the Collateral Quality Matrix

Some particular strengths of the transaction are (1) the collateral quality, which consists mostly of senior-secured floating-rate MM loans; (2) the adequate diversification of the portfolio of collateral obligations (the current DScore of 38 compared with test level of 23); and (3) no long-dated assets that mature after the Stated Maturity are permitted to be purchased. Some challenges were identified as follows: (1) the WA 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 Secured Notes in an Event of Default.

The transaction is performing according to the contractual requirements of the NPSA and the Amendment. As of March 15, 2023, the Issuer is in compliance with all Coverage and Collateral Quality Tests, as well as the Concentration Limitation tests. There were no defaulted obligations registered in the underlying portfolio as of March 15, 2023.

DBRS Morningstar modeled the transaction using the DBRS Morningstar CLO Asset model and its proprietary cash flow engine, which incorporated assumptions regarding principal amortization, the amount of interest generated, default timings, and recovery rates, among other credit considerations referenced in the DBRS Morningstar rating methodology, “Cash Flow Assumptions for Corporate Credit Securitizations.” Model-based analysis produced acceptable results. Along with satisfaction of the Eligibility Criteria, they warranted the finalization of the provisional ratings on the Secured Notes.

To assess portfolio credit quality, DBRS Morningstar provides a credit estimate or internal assessment for each nonfinancial corporate obligor in the portfolio not rated by DBRS Morningstar. 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.

The transaction assumptions consider DBRS Morningstar’s baseline macroeconomic scenarios for rated sovereign economies, available in its commentary “Baseline Macroeconomic Scenarios for Rated Sovereigns: April 2023 Update,” published on April 28, 2023 (https://www.dbrsmorningstar.com/research/413218). These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse Coronavirus Disease (COVID-19) pandemic scenarios, which were first published in April 2020.

For more information regarding DBRS Morningstar’s additional adjustment for select industries related to the coronavirus pandemic, please see its May 18, 2020, commentary, “CLO Risk Exposure to the Coronavirus Disease (COVID-19)” at https://www.dbrsmorningstar.com/research/361112.

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 DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929 (May 17, 2022).

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodologies applicable to the ratings are Rating CLOs and CDOs of Large Corporate Credit (February 7, 2023; https://www.dbrsmorningstar.com/research/409498) and Cash Flow Assumptions for Corporate Credit Securitizations (February 7, 2023; https://www.dbrsmorningstar.com/research/409499).

Other methodologies referenced in this transaction are listed at the end of this press release.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

The rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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

-- Rating CLOs and CDOs of Large Corporate Credit and DBRS Morningstar CLO Asset Model Version 2.3.1 (February 7, 2023), www.dbrsmorningstar.com/research/409498

-- Cash Flow Assumptions for Corporate Credit Securitizations (February 7, 2023), www.dbrsmorningstar.com/research/409499

-- Operational Risk Assessment for Collateralized Loan Obligation (CLO) and Collateralized Debt Obligation (CDO) Managers of Large Corporate Credits (September 23, 2022), https://www.dbrsmorningstar.com/research/403042

-- Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022), https://www.dbrsmorningstar.com/research/402153

-- Legal Criteria for U.S. Structured Finance (December 7, 2022), https://www.dbrsmorningstar.com/research/407008

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/278375.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.