DBRS Morningstar Finalizes Provisional Ratings on the Secured Notes of BlackRock DLF X CLO 2022-1, LLC

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the Notes (together, the Secured Notes), including upgrading its provisional rating on the Class C Notes to BBB (sf) from BBB (low) (sf), issued by BlackRock DLF X CLO 2022-1, LLC, pursuant to the Note Purchase and Security Agreement (the NPSA) dated as of August 5, 2022, among BlackRock DLF X CLO 2022-1, LLC, as the Issuer; Wilmington Trust National Association, as the Collateral Agent, Custodian, Collateral Administrator, Information Agent, and Note Agent; and the Purchasers.

-- Class A-1 Notes at AAA (sf)
-- Class A-2 Notes at AA (high) (sf)
-- Class B Notes at A (low) (sf)
-- Class C Notes upgraded to BBB (sf) from BBB (low) (sf)
-- Class D 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 repayment of principal on or before the Stated Maturity of August 5, 2034.

The ratings on the Class B, Class C, Class D, and Class W Notes address the ultimate payment of interest (excluding the additional interest payable at the Post-Default Rate, as defined in the NPSA) and the ultimate repayment of principal on or before the Stated Maturity. The Class W Notes have a fixed-rate coupon that is lower than the spread/coupon of some of the more-senior Secured Notes. The Class W Notes also benefit from the Class W Note Payment Amount, which allows for principal repayment of the Class W Notes with collateral interest proceeds, in accordance with the Priority of Payments.

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

CREDIT RATING RATIONALE/DESCRIPTION
The rating actions is a result of DBRS Morningstar’s surveillance review of the transaction. DBRS Morningstar finalized its provisional ratings on the Secured Notes, as the transaction is in compliance with its Eligibility Criteria (each capitalized term as defined in the NPSA). The current transaction performance is also within DBRS Morningstar’s expectation. The upgrade of the rating on the Class C Notes is a result of the Class C Notes’ performance being above DBRS Morningstar’s expectation. The Stated Maturity is August 5, 2034. The Reinvestment Period ends on August 5, 2026.

The credit ratings reflect the following primary considerations:

(1) The NPSA, dated as of August 5, 2034.
(2) The integrity of the transaction’s structure.
(3) DBRS Morningstar’s assessment of the portfolio quality.
(4) Adequate credit enhancement to withstand DBRS Morningstar’s projected collateral loss rates under various cash flow-stress scenarios.
(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 the DBRS Morningstar “Legal Criteria for U.S. Structured Finance” methodology (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 134.18
Class B OC Ratio 119.11
Class C OC Ratio 117.63
Class D OC Ratio 112.76

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

Collateral Quality Tests:

Minimum WA Spread Test: 5.0%, Subject to the Collateral Quality Matrix
Minimum WA Coupon Test: 7.0%
Maximum DBRS Morningstar Risk Score Test: 41.75, Subject to the Collateral Quality Matrix
Minimum Diversity Score Test: 8, Subject to the Collateral Quality Matrix
Minimum WA DBRS Morningstar Recovery Rate Test: 43.8%, 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; and (2) the adequate diversification of the portfolio of collateral obligations (the current DScore of 16 compared with test level of 8). 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. As of June 12, 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 June 12, 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 satisfactory results, which supported 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.

DBRS Morningstar’s credit ratings on the Secured Notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the principal and interest due on the Secured Notes.

DBRS Morningstar’s credit ratings do not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations. For example, the ratings do not address any additional interest due on Secured Notes at the Post-Default Rate (as defined in the NPSA).

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar 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.

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

The transaction assumptions consider DBRS Morningstar’s baseline macroeconomic scenarios for rated sovereign economies, available in its commentary “Baseline Macroeconomic Scenarios for Rated Sovereigns: June 2023 Update”, published on June 30, 2023 (https://www.dbrsmorningstar.com/research/416703). These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse COVID-19 pandemic scenarios, which were first published in April 2020.

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/416784 (July 4, 2023).

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; www.dbrsmorningstar.com/research/409498) and “Cash Flow Assumptions for Corporate Credit Securitizations” (February 7, 2023; 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.

DBRS, Inc.
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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 2.2.3.1 (February 7, 2023), www.dbrsmorningstar.com/research/409498

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

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

-- 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 (June 9, 2023), www.dbrsmorningstar.com/research/415687

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.