DBRS Assigns Rating of BBB (sf) to OZLME II LTD Funding Facility

DBRS Ratings Limited (DBRS) has today assigned a rating of BBB (sf) to the Funding Facility (FF or the Facility) of OZLME II LTD (the Borrower) in relation to OZLME II Designated Activity Company (the Issuer or OZLME II DAC).

The rating on the FF addresses the timely payment of interest and the ultimate payment of principal payable on or before the Warehouse Termination Date in March 2031. The warehouse documents were first executed in March 2017 and subsequently amended on 27 April 2017 to reflect some additional changes.

The Borrower is an exempted company with limited liability incorporated under the laws of the Cayman Islands. The warehouse transaction is set up as a cash flow securitisation, which will be collateralised by a portfolio of leveraged loans and high-yield bonds subject to Collateral Quality and Portfolio Profile Tests. The Facility is drawn by the Borrower which in turn will fund the Issuer via purchase of Profit Participating Notes (PPNs) to acquire the warehouse portfolio. The Instructing Investor has the security over the PPNs which in turn have the security over the Issuer’s portfolio. Och-Ziff Europe Loan Management Limited (Och-Ziff) will act as the Issuer’s Collateral Manager (CM).

As of 20 April 2017, the transaction portfolio consisted of EUR 66.4 million of collateral obligations extended to 28 unique obligors. The Borrower will continue to draw on the Facility based on a predetermined schedule as trades settle. Upon each drawing request, the CM will ensure that certain tests are in compliance on an asset-traded balance. As the trades settle in the warehouse portfolio, under the drawing schedule, Barclays Bank Plc (Barclays; the Lender) will continue to fund the Facility upon the Borrower’s request. In its analysis, DBRS has considered the Lender’s ability to fund the Facility and it will continue to monitor the transaction as part of ongoing surveillance.

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 Optional Early Redemption Date, Mandatory Early Redemption Date, a Lender Optional Early Redemption Date in Full or 22 March 2031. Mandatory Early Redemption can be caused by an event of default (EOD) that is continuing and optional early redemption can be caused at the option of key parties involved in the transaction. Other than an EOD, warehouse redemption can only occur if certain tests are satisfied. Subject to consents of the Lender, there could potentially be deficiency in the payment of ultimate principal if such options were exercised prior to the maturity of the warehouse. DBRS will continue to monitor the transaction.

Citibank, N.A., London Branch will act as the Accounts Bank and the CM will operate the Bank Accounts. As per the transaction documentation, if the rating of the Accounts Bank is either withdrawn or downgraded below “A,” such entity must be replaced within 30 calendar days by a financial institution with a DBRS public rating of “A.”

DBRS conducted an operational review of the CM’s operations for collateralised loan obligations (CLOs) in January 2017 in London. The objective of the operational review was to assess the adequacy of Och-Ziff’s infrastructure and internal processes used to support investment decisions and portfolio monitoring. DBRS considers the origination and servicing practices of Och-Ziff to be consistent with current market practices as a whole.

DBRS has analysed two 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. The Collateral Quality Tests are different for each of the structures and concentration limits are based on the target CLO transaction amount of EUR 400 million.

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 FF size of EUR 130 million and a remainder of EUR 40 million in equity. In pre-pricing scenarios, the equity size gradually increases to EUR 40 million from EUR 5 million, to provide credit enhancement to the Facility. In post-pricing scenarios, the FF continues to increase in size and the relative credit enhancement decreases. As the size of the capital structure increases, the Collateral Quality Tests such as the DBRS recovery rate, weighted-average (WA) spread and WA coupon also change. The maximum notional of the warehouse in the post-pricing scenario would be EUR 320 million, constituting an FF size of EUR 280 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 FF size of EUR 160 million and a remainder of EUR 50 million in equity. In pre-pricing scenarios, the equity size gradually increases to EUR 50 million from EUR 5 million, to provide credit enhancement to the FF. In post-pricing scenarios, the FF continues to increase in size and the relative credit enhancement decreases. As the size of the capital structure increases, the Collateral Quality Tests such as the DBRS recovery rate, WA spread and WA coupon also change. The maximum notional of the warehouse in the post-pricing scenario would be EUR 400 million, constituting a Facility size of EUR 350 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 either use (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 CM is obligated to provide the necessary information to DBRS to complete the Credit Estimate. Such Credit Estimates will be used to continuously monitor the transaction.

The rating of the Facility is based on DBRS’s review of the above-mentioned factors and the following analytical considerations:

-- The transaction structure, the form and sufficiency of available credit enhancement as well as 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 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 and the Lender.

DBRS did 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 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 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 the first point in the matrix, in a post-pricing scenario warehouse notional is expected to be EUR 170 million.
-- An increase in Risk Score by 15% will have no impact on the FF rating.
-- An increase in Risk Score by 30% will have no impact on the FF rating.

(2) For the last point in the matrix, in a post-pricing scenario warehouse notional is expected to be EUR 320 million.
-- An increase in Risk Score by 15% will lead to a downgrade to BBB (low) (sf).
-- An increase in Risk Score by 30% will lead to a downgrade of FF to BB (high) (sf).

Drawdown Structure of total EUR 400 million warehouse:
(1) For the first point in the matrix, in a post-pricing scenario warehouse notional is expected to be EUR 210 million.
-- An increase in Risk Score by 15% will have no impact on the FF rating.
-- An increase in Risk Score by 30% will have no impact on the FF rating.

(2) For the last point in the matrix, in a post-pricing scenario warehouse notional is expected to be EUR 400 million.
-- An increase in Risk Score by 15% will have no impact on the FF rating.
-- An increase in Risk Score by 30% will lead to a downgrade of FF to BB (high) (sf).

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.

Lead Analyst: Mudasar Chaudhry, Vice President
Rating Committee Chair: Jerry van Koolbergen, Managing Director
Initial Rating Date: 28 April 2017

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 analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375