DBRS Confirms the AA (sf) Rating of the Probability that Master Asset Vehicle II Will Request Funds from Deutsche Bank AG under the Margin Funding Facility

DBRS Limited (DBRS) has today confirmed the AA (sf) rating of the probability of the first dollar being drawn on the Margin Funding Facility dated January 21, 2009 (the MFF), available to Master Asset Vehicle II (MAVII). In this circumstance, DBRS has applied its Long-Term Obligations rating scale to address the probability of the draw being made.

The rating is an opinion based on the following factors: (1) the credit quality of the leveraged super-senior credit default swaps (LSS CDS) held by MAVII, (2) the distance of the index spreads to the relevant spread/loss triggers included in the MAVII structure, (3) the current market conditions and (4) the fact that each LSS CDS counterparty facing MAVII (including, without limitation, Deutsche Bank AG (DBAG)) provides its own mid-market quotations and replacement cost estimates for its LSS CDS (at its sole discretion, but subject to a dispute resolution mechanism) that are used to determine whether MAVII has sufficient collateral or whether a draw on the MFF is required under the circumstances.

The rating is also based on the assumption that each of the various parties involved in the reporting processes required to determine whether a draw on the MFF is required (including, without limitation, the Spread/Loss Trigger Calculation Agent, the Index Spread Calculation Agent, the Valuation Agent, the Administrator and each Dealer or Lender (each, as defined or set out in the MAVII transaction documents)) will comply with its obligations under the MAVII transaction documents.

MAVII is a bankruptcy-remote special-purpose entity established as a trust under the laws of the province of Ontario as part of the restructuring of certain Canadian third-party asset-backed commercial paper (ABCP) conduits under the Montréal Accord. Some of the asset interests held by MAVII are LSS CDS. In connection with the restructuring of the Canadian third-party ABCP, the existing LSS CDS were restructured (the ABCP Restructuring) such that certain trigger levels were set with respect to the index spreads for (what was then) five matrices relating to the LSS CDS. The MFF was established primarily to be available to MAVII in the event that a margin call is made and MAVII does not have sufficient collateral to satisfy the margin call. The MFF is provided by certain Canadian financial institutions and the dealers/counterparties to the LSS CDSs, including, without limitation, DBAG. In the event that MAVII draws on the MFF, DBAG will be required to provide an advance, ratably and on a several basis. For more information on the Montréal Accord and MAVII, please visit www.dbrs.com.

Under the terms of the MFF and the MAVII transaction documents, MAVII can request an advance under the MFF in a number of circumstances, the most important of which is in the event that a second spread/loss trigger event occurs under the MAVII transaction documents and, at that time, MAVII does not have sufficient collateral as required by the terms of the MAVII transaction documents. MAVII can also request an advance under the MFF in the event that any cash settlement amounts are owing by it under an LSS CDS that have not otherwise been satisfied by delivery of collateral or other means, or in the event that an LSS CDS terminates (or all LSS CDSs for a particular dealer/counterparty terminate) and MAVII’s obligations to the relevant dealer/counterparty in relation to that LSS CDS (or all LSS CDSs with that dealer/counterparty) have not otherwise been satisfied by delivery of collateral or other means. As above, this rating is an opinion that DBAG will be requested to make an advance under the MFF; more specifically, it is a rating on the probability of the first dollar being drawn on the MFF in accordance with the terms of the MAVII transaction documents, of which DBAG will be required to advance its pro rata share.

The above-mentioned rating does not take into account (1) the probability that there would not be sufficient funds available under the MFF to satisfy any required collateral amounts; (2) whether a lender has (or will) become a breaching lender under the terms of the MFF; (3) whether any lender will provide additional advances once its commitments under the MFF have been fully drawn; (4) whether any lender is downgraded below the applicable minimum ratings threshold under the terms of the MFF and, if so, whether it will provide collateral or other credit enhancement as required under the terms of the MFF; (5) whether a potential terminal unwind event or a terminal unwind event has occurred or will occur under the MAVII transaction documents; (6) performance by BlackRock Asset Management Canada Ltd. of its duties and the exercise of its discretion in acting as administrator of MAVII (other than as noted above); (7) the impact that the legal and structural elements may have on the MAVII transaction (other than as noted above); (8) the mark-to-market exposure that may exist after the first dollar is drawn under the MFF; or (9) repayment of the (non-breaching) MFF lenders (who are paid in priority to the MAVII noteholders) and repayment of the other specified creditors under the MAVII transaction documents (including the MAVII noteholders).

Since the last rating confirmation in November 2014, one optional redemption unwind has been completed on MAVII notes (referred to as Early Redemptions), as described in more detail in DBRS’s commentary “DBRS Comments on Amendments to Master Asset Vehicle II Transaction Documents,” dated October 2, 2013. As a result of the Early Redemptions to date, a total of $2.79 billion of the original MFF commitment was reduced on a pro rata basis among the MFF lenders (in proportion to the amount of Early Redemptions). As of October 7, 2015, the total remaining MFF commitment was $1.1 billion, of which $469 million was from DBAG.

Since the ABCP Restructuring, there are three matrices related to the LSS CDSs remaining (the CDX IG5 10 year, CDX IG7 10 year, and iTraxx S6 10 year). CDX5 10Y index is approaching its maturity on Dec. 20, 2015. Since the respective trigger levels for all three remaining matrices have continued to rise, the spreads as percentages of the current triggers are below 10% for all three matrices. Two credit events have occurred in the reference portfolios since the last rating confirmation in November 2014: RadioShack Corporation and Caesar Entertainment Corporation’s casino operating unit (formerly Harrah’s Operating Company, Inc.) filed for Chapter 11 bankruptcy in early 2015.

Overall, an additional year of time decay and the maturation and/or voluntary termination of multiple LSS CDSs have reduced the credit risk in MAVII. As a result, DBRS has confirmed the AA (sf) rating on the probability that MAVII will request funds from DBAG under the MFF.

Notes:
The applicable methodologies for this rating are Rating CLOs and CDOs of Large Corporate Credit (June 2015), Canadian Surveillance Methodology for CDOs of Large Corporate Credit (July 2015) and Legal Criteria for Canadian Structured Finance (August 2015), each of which can be found on our website under Methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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