DBRS Finalises Provisional Ratings to Dryden 62 Euro CLO 2017 B.V.

DBRS Ratings Limited (DBRS) finalised its provisional ratings on the Senior Funding Facility (SFF) and the Mezzanine Funding Facility (MFF; together, the Facilities) of Dryden 62 Euro CLO 2017 B.V. (the Borrower) as follows:

-- SFF rated A (sf)
-- MFF rated BBB (low) (sf)

The rating on the SFF addresses the timely payment of interest and the ultimate payment of principal payable on or before the Warehouse Termination Date in June 2031. The rating on the MFF addresses the ultimate payment of interest and principal payable on or before the Warehouse Termination Date in June 2031. DBRS finalised the provisional ratings it previously assigned on 23 February 2018 as the aggregate principal balance of the assets, based on committed trades, in the warehouse has reached over EUR 65 million (as per clause 6.3 (c) of Warehouse Deed), and all collateral quality and portfolio profile tests are in compliance. The warehouse documents were executed on 20 December 2017.

The Borrower is a limited liability private company incorporated under the laws of The Netherlands. 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 eligibility criteria, collateral quality and portfolio profile tests. PGIM Limited (PGIM) will act as the Collateral Manager (CM) of the Borrower.

As of 1 March 2018, the transaction portfolio consisted of EUR 88.5 million of collateral obligations extended to 27 issuers. The Borrower will continue to draw on the Facilities 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; Senior and Mezzanine Lender, which is rated “A” with a Stable trend by DBRS) will continue to fund the Facilities upon the Borrower’s request. In its analysis, DBRS considered the Senior and Mezzanine Lenders’ ability to fund the Facilities, 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 or June 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 Senior and Senior Mezzanine 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.

Elavon Financial Services Designated Activity Company will act as the Account Bank. As per the transaction documentation, if the rating of the Account 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 Collateral Manager’s operations for Collateralised Loan Obligations (CLOs) in May 2016 in London, and held a refresh operational review in December 2017. The objective of the operational review was to assess the adequacy of PGIM’s infrastructure and internal processes used to support investment decisions and portfolio monitoring. DBRS considers the origination and servicing practices of PGIM as a whole to be consistent with current market practices.

DBRS has analysed a covenant matrix structure where total warehouse notional will be up to EUR 200 million with the equity notional increasing to EUR 50 million. The last drawing point in a pre-pricing scenario is expected to have total capitalisation of EUR 200 million, which constitutes an SFF size of EUR 145 million, an MFF size of EUR 5 million and the remaining EUR 50 million in equity. In pre-pricing scenarios, the equity size gradually increases to EUR 50 million from EUR 5 million; the MFF size can be increased or reduced to provide credit enhancement to the SFF. As the size of the capital structure increases, collateral quality tests, such as, the DBRS recovery rate, weighted-average (WA) spread and WA coupon, also change.

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 ratings of the Facilities are 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, the presence of legal opinions that address the true sale of the assets to the Borrower, the non-consolidation of the Borrower and 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 to the rating 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.

An asset and a cash flow analysis were both conducted. Due to the inclusion of a reinvestment period in the transaction, the analysis is based on the worst-case replenishment criteria set forth in the transaction legal documents.

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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.

The sources of data and information used for this rating include Borrower, the CM and the Senior and Mezzanine Lender.

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

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

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

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

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

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 200 million warehouse:
For the last point in the matrix, in a pre-pricing scenario, the warehouse notional amount is expected to be EUR 200 million.
-- An increase in Risk Score by 15% would lead to a downgrade to A (low) (sf) on the SFF rating, with no impact on the MFF rating.
-- An increase in Risk Score by 30% would lead to a downgrade to BBB (high)(sf) on the SFF rating, with no impact on the MFF 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 and US regulations only.

Lead Analyst: Mudasar Chaudhry, Vice President
Rating Committee Chair: Jerry van Koolbergen, Managing Director
Initial Rating Date: 12 January 2018

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.

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

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.

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