DBRS Assigns Provisional Ratings to Callidus ABL 2016-1 Loans

DBRS, Inc. (DBRS) has today assigned the following provisional ratings to loans (together, the Rated Loans) issued by Callidus ABL 2016-1 (the Issuer):

-- $36,765,000 (CAD) Class A Loans due July 2024 rated AAA (sf)
-- $28,658,257 (USD) Class A Loans due July 2024 rated AAA (sf)
-- $6,189,394 (CAD) Class B Loans due July 2024 rated AA (sf)
-- $4,824,622 (USD) Class B Loans due July 2024 rated AA (sf)
-- $5,322,879 (CAD) Class C Loans due July 2024 rated A (sf)
-- $4,149,175 (USD) Class C Loans due July 2024 rated A (sf)
-- $3,713,636 (CAD) Class D Loans due July 2024 rated BBB (sf)
-- $2,894,773 (USD) Class D Loans due July 2024 rated BBB (sf)
-- $7,031,152 (CAD) Class E Loans due July 2024 rated BB (sf)
-- $5,480,771 (USD) Class E Loans due July 2024 rated BB (sf)

The provisional ratings of the Rated Loans are being assigned pursuant to the agreements expected by and among Callidus ABL 2016-1 as Borrower, Callidus Capital Corporation (Callidus) as Collateral Manager and Deutsche Bank Securities Inc. as the Arranger for this transaction.

Callidus ABL 2016-1 is a cash flow securitization which will be collateralized by a portfolio of senior secured middle market U.S. and Canadian asset-backed corporate loans. The initial portfolio will include collateral loans with an aggregate par balance of CAD 165 million in the transaction portfolio. Callidus will act as the Collateral Manager of the Borrower. The Borrower is a corporation incorporated under the laws of the Province of Ontario.

The transaction has a two-year revolving period, during which the Borrower may purchase new loans so long as the Reinvestment Criteria are satisfied. The revolving period will end prematurely after the occurrence of an Event of Default that results in Acceleration of the Rated Loans.

The above ratings on the Rated Loans are provisional. To the extent that the documents and information provided to DBRS by the Borrower, the Arranger or the Collateral Manager as of this date differ from the executed versions of the governing transaction documents, DBRS may assign lower finalized ratings to the Loans or may avoid assigning finalized ratings to the Loans altogether.

The ratings on the Class A Loans and Class B Loans address the timely payments of interest and the ultimate payments of principal on or before the Maturity Date in July 2024. Any shortfall in the payment of interest on the Class A Loans and B Loans for the first 24 Payment Dates can be covered by the outstanding balance of the interest Reserve Account, which will have an initial balance at closing of CAD 700,000. The ratings on the Class C Loans, Class D Loans and Class E Loans address the ultimate payments of interest and the ultimate payments of principal on or before the Maturity Date in July 2024.

To assess portfolio credit quality, DBRS will provide a credit estimate or internal assessment for each corporate obligor not publicly rated in the portfolio. Credit estimates are not ratings; rather, they represent a primarily model-driven default probability for each obligor that is used in assigning ratings to the transaction.

The ratings of the Class A Loans, Class B Loans, Class C Loans, Class D Loans and Class E Loans are based on DBRS’s review of the following items:

Due to the revolving nature of this transaction, the Portfolio Concentration Limitations, Portfolio Quality Tests, Reinvestment Criteria and Eligibility Criteria were used to create a worst-case portfolio which was applied in the DBRS CLO Asset Model to determine lifetime rating-based default rates (Hurdle Rates):

General Modeling Assumptions
-- Maximum weighted-average DBRS Risk Score: 70%
-- Minimum DBRS Diversity Score: 8.0
-- Maximum WAL: 5.0 years
-- Maximum single obligor exposure: 10% (1)
-- Maximum single industry exposure: 12% (2)
-- Minimum WAS: 10.0%
-- Maximum floating rate assets: 10%
-- Minimum WAC: 12.5%
-- Minimum WA Recovery Rate: 45%
-- Maximum USD-denominated collateral: 58%
-- Minimum USD-denominated collateral: 43%
-- Maximum CAD-denominated collateral: 57%
-- Minimum CAD-denominated collateral: 42%

(1) Three exceptions at 12%.
(2) One exception at 25% and three exceptions at 15%.

100% of the collateral will be Senior Secured Loans domiciled in either the United States or Canada.

Foreign Exchange Rate Risk
-- Collateral can be denominated in either USD or CAD; therefore, DBRS has run multiple F/X scenarios to stress both the appreciation and depreciation of each currency against the other, while also biasing defaults towards the collateral denominated in the appreciating currency.
-- These stresses were run on a portfolio with a USD-denominated collateral allocation of 50.5% and CAD-denominated collateral allocation of 49.5%, in addition to portfolio scenarios where each currency was run at their respective maximum and minimum collateral allocations, as noted above.

Interest Rate Risk
-- The Issuer has not entered into any interest rate hedging agreement and is therefore exposed to interest rate risk. However, DBRS considers this risk to be minimized by the fact that the liabilities (the Rated Loans) pay fixed-rate interest, and the majority of the portfolio also pays on a fixed-rate basis.
-- The Class A Loans and Class B loans were put through a series of liquidity stresses where defaults were heavily front-loaded in the first year and deferrable collateral was assumed to cease paying interest immediately to test the suitability of the interest Reserve Account to cover interest shortfall on the non-deferrable Rated Loans. Neither the Class A Loans nor the Class B Loans deferred interest in any of the cash flow stresses.

At Closing, the Class A Loans will benefit from initial credit enhancement of 55.00% and stand to benefit from the diversion of excess spread in the event of a failure of any of the Coverage Tests, which DBRS considers sufficient to support the AAA (sf) rating.

At Closing, the Class B Loans will benefit from initial credit enhancement of 47.40% and stand to benefit from the diversion of excess spread in the event of a failure of any of the Coverage Tests, once the Class A Loans are repaid in full, which DBRS considers sufficient to support the AA (sf) rating.

At Closing, the Class C Loans will benefit from initial credit enhancement of 40.9% and stand to benefit from the diversion of excess spread in the event of a failure of some of the Coverage Tests, once the more senior Rated Loans have been repaid in full, which DBRS considers sufficient to support the A (sf) rating.

At Closing, the Class D Loans will benefit from initial credit enhancement of 36.36% and stand to benefit from the diversion of excess spread in the event of a failure of some of the Coverage Tests, once the more senior Rated Loans have been repaid in full, which DBRS considers sufficient to support the BBB (sf) rating.

At Closing, the Class E Loans will benefit from initial credit enhancement of 27.80% and stand to benefit from the diversion of excess spread in the event of a failure of some of the Coverage Tests, once the more senior Rated Loans have been repaid in full, which DBRS considers sufficient to support the BB (sf) rating.

Notes:
The principal methodology applicable is Rating CLOs and CDOs of Large Corporate Credit, which can be found on our website under Methodologies. DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

The other rating methodologies used in the analysis of this transaction are listed below and can be found at: http://www.dbrs.com/about/methodologies.

-- Legal Criteria for U.S. Structured Finance
-- Cash Flow Assumptions for Corporate Credit Securitizations
-- DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.