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

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

The credit ratings on the Class A-1 and 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 credit ratings on the Class B Notes, Class C Notes, Class D Notes, Class E Notes, and Class W Notes address the ultimate payment of interest (including any Deferred Interest, but 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.

CREDIT RATING RATIONALE/DESCRIPTION
The credit rating action is a result of a benchmark replacement event that occurred as of July 3, 2023, pursuant to the NPSA and the application by DBRS Morningstar of the “Global Methodology for Rating CLOs and Corporate CDOs,” including the DBRS Morningstar CLO Insight Model, released on October 22, 2023. On August 11, 2023, DBRS Morningstar placed its credit ratings on the Secured Notes Under Review with Developing Implications to analyze the transaction pursuant to the benchmark replacement event.

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 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 Borrower and the consistency with the DBRS Morningstar “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, 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 Recovery Rate (WARR), and Weighted-Average Spread (WAS) Level. DBRS Morningstar analyzed each structural configuration as a unique transaction, and all configurations (rows) passed the applicable DBRS Morningstar credit rating stress levels. The Coverage Tests and triggers as well as the Collateral Quality Tests that DBRS Morningstar utilized in its analysis are presented below:

Class A Overcollateralization (OC): 143.97%
Class B OC: 135.27%
Class C OC: 128.66%
Class D OC: 119.22%
Class E OC: 110.75%

Class A Interest Coverage (IC): 150.00%
Class B IC: 140.00%
Class C IC: 130.00%
Class D IC: 120.00%
Class E IC: 110.00%
Class W IC: 100.00%

Minimum WAS: 5.50%
Minimum Weighted-Average Coupon: 6.00%
Maximum DBRS Morningstar Risk Score: 38.75%
Minimum WARR: 46.8%
Minimum DScore: 23
Maximum Weighted-Average Life: 7.0 years

The transaction is performing according to the parameters set in the amended NPSA. As of September 5, 2023, the Borrower is in compliance with all coverage and collateral quality tests and there were no defaulted obligations registered in the portfolio. The current credit quality of the portfolio is reflected in the actual DBRS Morningstar Risk Score of 35.17.

Some particular strengths of the transaction are (1) the collateral quality, which consists mostly of senior-secured middle market loans, (2) the adequate diversification of the portfolio of collateral obligations (DScore currently at 41 versus test level of 23), and (3) the Collateral Manager’s expertise in CLOs and overall approach to the selection of Collateral Obligations.

Some challenges were identified in that (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 credit ratings once purchased and (2) the underlying collateral portfolio may be insufficient to redeem the Secured Notes in an Event of Default.

DBRS Morningstar analyzed the amended transaction using the DBRS Morningstar CLO Insight Model and its proprietary cash flow engine, which incorporated assumptions regarding principal amortization, principal pre-payments, amount of interest generated, default timings, and recovery rates, among other credit considerations referenced in the DBRS Morningstar “Global Methodology for Rating CLOs and Corporate CDOs” (October 22, 2023; https://www.dbrsmorningstar.com/research/422269). Model-based analysis produced satisfactory results, which supported the confirmation of the credit 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 credit ratings; rather, they represent a model-driven default probability for each obligor that is used in assigning credit ratings to a facility.

For more information regarding DBRS Morningstar’s additional adjustment for select industries related to the Coronavirus Disease (COVID-19), please see its May 18, 2020, commentary, “CLO Risk Exposure to the Coronavirus Disease (COVID-19)” at 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: September 2023 Update” (https://www.dbrsmorningstar.com/research/421227), published on September 28, 2023. These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse coronavirus pandemic scenarios, which were first published in April 2020.

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 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 (July 4, 2023) at https://www.dbrsmorningstar.com/research/416784.

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

The principal methodology applicable to each of the affected credit ratings is the Global Methodology for Rating CLOs and Corporate CDOs and the DBRS Morningstar CLO Insight Model (v.1.0.0.0) (October 22, 2023; https://www.dbrsmorningstar.com/research/422269).

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 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.

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 credit rating action.

This is a solicited credit rating.

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

-- Operational Risk Assessment for Collateralized Loan Obligations (CLOs) and Corporate Collateralized Debt Obligations (CDOs) (September 14, 2023; https://www.dbrsmorningstar.com/research/420608)

-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

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

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