DBRS Finalises Provisional Ratings on Cadogan Square CLO VIII D.A.C.

DBRS Ratings Limited (DBRS) has today finalised the provisional ratings on the Senior Funding Facility and the Senior Mezzanine Funding Facility (together, the Facilities) issued by Cadogan Square CLO VIII D.A.C. (the Borrower), as follows:

-- Senior Funding Facility at A (sf)
-- Senior Mezzanine Funding Facility at BBB (low) (sf)

The rating on the Senior Funding Facility (SFF) addresses the timely payment of interest and the ultimate payment of principal payable on or before the Warehouse Maturity Date in July 2031. The rating on the Senior Mezzanine Funding Facility (SMFF) addresses the ultimate payment of interest and the ultimate payment of principal payable on or before the Warehouse Maturity Date in July 2031. DBRS has finalised provisional ratings as the aggregate principal balance of the assets (based on committed trades) in the warehouse has reached EUR 60 million as per clause 6.3(d) (i) of the Warehouse Deed. DBRS tested four different covenant matrices, as the Collateral Manager (CM) can choose which one of them has to be applied. Each covenant matrix is unique and differentiated by whether GBP assets are purchased and whether warehouse total equity notional will be EUR 40 million or EUR 50 million.

The Borrower is a designated activity company incorporated under the laws of Ireland. The warehouse transaction is set up as a cash flow securitisation and is collateralised by a portfolio of leveraged loans and high yield bonds subject to Eligibility Criteria, Collateral Quality and Portfolio Profile Tests. Credit Suisse Asset Management Limited (CSAM) will act as the CM of the Borrower.

As of 27 September 2016, the transaction portfolio consisted of three euro-denominated bonds and 23 euro-denominated loans, extended to 26 issuers. The Borrower will continue to draw on the Facilities based on a predetermined schedule. Upon each drawing request, the CM will ensure that certain tests are in compliance. As the trades settle in the warehouse portfolio, under the drawing schedule Barclays Bank Plc (Senior and Mezzanine Lender) will continue to fund the Facilities upon the Borrower’s request. In its analysis, DBRS has considered Barclays Bank PLC’s ability to fund the Facilities and it will continue to monitor the transaction as part of ongoing surveillance. Barclays Bank PLC currently has a DBRS long-term debt rating of A (high) with a Negative trend.

The warehouse has a 12-month reinvestment period followed by an amortisation period. The warehouse will reach its maturity date at the earlier of the CLO Closing Date, the Early Redemption Date or July 2031. Early redemption can be caused by an Event of Default (EoD) or at the option of key parties involved in the transaction. Other than an EoD, warehouse redemption can only occur if certain tests are satisfied.

The Bank of New York Mellon, London Branch will act as the Account Bank, and the CM will operate the borrower accounts. As per the transaction documentation, if the rating of the Account Bank is either withdrawn or downgraded below “A” by one or more rating agencies, such entity must be replaced within 30 calendar days by a financial institution with a public rating of “A” by one or more rating agencies.

DBRS conducted an operational review of the CM’s operations for collateralised loan obligations (CLOs) in June 2016 in London. The objective of the operational review was to assess the adequacy of CSAM’s infrastructure and internal processes used to support investment decisions and portfolio monitoring. DBRS considers the origination and servicing practices of CSAM as a whole to be consistent with current market practices.

DBRS has analysed four different covenant matrices. Depending on the total size of equity, the total notional of the warehouse will either reach EUR 320 million or EUR 400 million. Within these two drawdown structures, the CM can either opt for a euro-only structure or opt for a structure that contains 20 million euro equivalent of GBP-denominated assets. The Collateral Quality Tests are different for each of the four structures.

The total capitalisation of EUR 90 million consists of an SFF size of EUR 45 million, an SMFF size of EUR 20 million and the remaining EUR 25 million in equity.

For the EUR 320 million structure, the first drawing point in a post-pricing scenario is expected to have total capitalisation of EUR 170 million, which constitutes an SFF size EUR 117.5 million, an SMFF size of EUR 12.5 million and the remaining EUR 40 million in equity. In pre-pricing scenarios, as the equity size gradually increases from EUR 5 million to EUR 40 million, the SMFF size can be increased or reduced to provide credit enhancement to the SFF. In post-pricing scenarios, both SFF and SMFF increase in size and the relative credit enhancement decreases. As the size of the capital structure increases, the Collateral Quality Tests like the DBRS Recovery Rate, Weighted-Average Spread and Weighted-Average Coupon also change. The maximum notional of the warehouse in the post-pricing scenario would be EUR 320 million, which constitutes an SFF size of EUR 230 million, an SMFF size of EUR 50 million and a remainder of EUR 40 million in equity.

For the EUR 400 million structure, the first drawing point in a post-pricing scenario is expected to have total capitalisation of EUR 210 million, which constitutes an SFF size of EUR 152.5 million, an SMFF size of EUR 7.5 million and the remaining EUR 50 million in equity. In pre-pricing scenarios, as the equity size gradually increases from EUR 5 million to EUR 50 million, the SMFF size can be increased or reduced to provide credit enhancement to the SFF. In post-pricing scenarios, both SFF and SMFF increase in size and the relative credit enhancement decreases. As the size of the capital structure increases, the Collateral Quality Tests like the DBRS Recovery Rate, Weighted-Average Spread and Weighted-Average Coupon also change. The maximum notional of the warehouse in the post-pricing scenario would be EUR 400 million, which constitutes an SFF size of EUR 295 million, an SMFF size of EUR 55 million and a remainder of EUR 50 million in equity.

DBRS used the publicly available CLO Asset Model to determine a lifetime pool default rate at the required rating levels for each drawing point. The CLO Asset Model takes key covenants of the portfolio to create a stressed modelling pool for each level of the drawing schedule based on the covenants. The CLO Asset Model employs a Monte Carlo simulation to determine cumulative default rates (or hurdle rates) at each rating stress level. Break-even default rates on the Facilities were determined in accordance with DBRS’s “Cash Flow Assumptions for Corporate Credit Securitizations” methodology.

For the underlying collateral analysis, DBRS will use one of the following: (1) its own publicly available ratings of each obligor; (2) where such ratings are not available, DBRS will use publicly available obligor ratings from other nationally recognised statistical rating organisations; and (3) if no public ratings are available, then the Senior Lender is under the obligation to provide necessary information to DBRS to complete the Credit Estimate. Such Credit Estimates will be used to continuously monitor the transaction.

The ratings of the Facilities are based upon DBRS’s review of the above-mentioned and the following analytical considerations:

-- The transaction structure, the form and sufficiency of available credit enhancement, and the portfolio characteristics. Most of the portfolio profile tests are set at a portfolio notional of EUR 400 million at all times, and DBRS created stressed modelling pools for its analysis based on these covenants.

-- The Borrower may purchase Ineligible Assets, which can only be funded by the subordinated noteholders. Any sales, purchases or proceeds of Ineligible Assets are separate from the Eligible Assets of the Borrower and are not part of the Priority of Payments.

-- The transaction parties’ financial strength and capabilities to perform their respective duties and the quality of origination, underwriting and servicing practices.

-- An assessment of the operational capabilities of key transaction participants.

-- The ability of the transaction to withstand stressed cash flow assumptions and repay lenders according to the terms of their investment. Interest and principal payments on the Facilities will accrue and are payable quarterly.

-- The soundness of the legal structure and the presence of legal opinions that address the true sale of the assets to the Borrower and the non-consolidation of the Borrower, as well as consistency with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is: Rating CLOs and CDOs of Large Corporate Credit.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

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

These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The sources of information used for this rating include the Borrower, the Collateral Manager, the Senior and Mezzanine Lender and the Trustee, BNY Mellon Corporate Trustee Services Limited.

DBRS does not rely upon third-party due diligence in order to conduct its analysis.

DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

This rating concerns a newly issued financial instrument. This is the first DBRS rating on this financial instrument.

This is the first rating action since the Initial Rating Date.

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.

To assess the impact of the changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

Drawdown Structure of total EUR 320 million warehouse:
(1) For a euro-only structure, the first drawing point in a post-pricing scenario would be at a warehouse notional of EUR 170 million.
-- An increase in the Risk Score by 15% will have no impact on the current rating of the Facilities.
-- An increase in the Risk Score by 30% will have no impact on the current rating of the Facilities.

(2) For a EUR 320 million structure where GBP assets can be purchased, the first drawing point in a post-pricing scenario would be at a warehouse notional of EUR 170 million.
-- An increase in the Risk Score by 15% will have no impact on the current rating of the Facilities.
-- An increase in Risk Score by 30% will have no impact on the SMFF rating, whereas it would lead to a downgrade to A (low) (sf) for the SFF rating.

Drawdown Structure of total EUR 400 million warehouse:
(1) For a euro-only structure, the first drawing point in a post-pricing scenario would be at warehouse notional of EUR 210 million.
-- An increase in the Risk Score by 15% will have no impact on the current rating of the Facilities.
-- An increase in Risk Score by 30% will have no impact on the SMFF rating, whereas it would lead to a downgrade to BBB (high) (sf) for the SFF rating.

(2) For a EUR 400 million structure where GBP assets can be purchased, the first drawing point in a post-pricing scenario would be at a warehouse notional of EUR 210 million.
-- An increase in Risk Score by 15% will have no impact on the SMFF rating, whereas it would lead to a downgrade to A (low) (sf) for the SFF rating.
-- An increase in Risk Score by 30% will have no impact on the SMFF rating, whereas it would lead to a downgrade to BBB (high) (sf) for the SFF rating.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Initial Lead Analyst: Mudasar Chaudhry
Initial Rating Date: 8 August 2016
Initial Rating Committee Chair: Jerry van Koolbergen

DBRS Ratings Limited
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Registered in England and Wales: No. 7139960

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

-- Legal Criteria for European Structured Finance Transactions
-- Rating CLOs and CDOs of Large Corporate Credit
-- Cash Flow Assumptions for Corporate Credit Securitizations
-- Unified Interest Rate Model for European Securitisations

A description of how DBRS analysis structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375