DBRS Assigns Provisional Ratings to CVC Cordatus Loan Fund XI D.A.C.

DBRS Ratings Limited (DBRS) assigned the following provisional ratings to the Senior Funding Facility (SFF) and the Mezzanine Funding Facility (MFF; together with the SFF, the Facilities) of CVC Cordatus Loan Fund XI D.A.C. (the Borrower):

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

The rating on the SFF addresses the timely payment of interest and the ultimate repayment of principal payable on or before the Warehouse Termination Date in February 2033. The rating on the MFF addresses the ultimate payment of interest and principal on or before the Warehouse Termination Date in February 2033. These provisional ratings shall only be finalised once the aggregate principal balance of the assets (based on committed trades) in the warehouse reaches EUR 52.5 million (as per Clause 6.3 (b) of the Warehouse Deed), and all collateral quality and portfolio profile tests are in compliance. The warehouse documents were executed on 20 March 2018.

The Borrower is a designated activity company incorporated under the laws of the Republic of Ireland. 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. CVC Credit Partners European CLO Management LLP (CVC) will act as the Borrower’s Collateral Manager (CM).

As of 20 March 2018, the transaction portfolio had no collateral obligations. The Borrower will start 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 and Standby Liquidity Provider; rated “A” with a Stable trend by DBRS) will continue to fund the Facilities upon the Borrower’s request. In its analysis, DBRS has considered the Senior and Mezzanine Lenders’ ability to fund the Facilities, and it will continue to monitor the transaction as part of its 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 in Full, the Mandatory Early Redemption Date or February 2033. Mandatory Early Redemption can be caused by an event of default (EOD) that is continuing while Optional Early Redemption can be initiated by choice of the 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 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.

The Bank of New York Mellon - London Branch (rated AA with a Stable trend by DBRS) will act as the Account Bank and the CM will operate the bank accounts. 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 CM’s operations for Collateralised Loan Obligations (CLOs) in February 2018 in London. The operational review assessed the adequacy of CVC’s infrastructure and internal processes used to support investment decisions and portfolio monitoring. DBRS considers the origination and servicing practices of CVC as a whole to be consistent with current market practices.

DBRS has analysed two different covenant matrices, as the CM can either opt for a structure with an equity size of up to EUR 32.0 million or up to EUR 50.0 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 32.0 million equity structure, the first drawing point in a post-pricing scenario is expected to have total capitalisation of EUR 130.0 million, which constitutes a SFF size of EUR 86.0 million, a MFF size of EUR 12.0 million and a remainder of EUR 32.0 million in equity. For the EUR 50.0 million equity structure, the first drawing point in a post-pricing scenario is expected to have total capitalisation of EUR 210.0 million, which constitutes a SFF size of EUR 158.0 million, a MFF size of EUR 2.0 million and a remainder of EUR 50.0 million in equity.

For both structures, in pre-pricing scenarios as the equity size gradually increases from EUR 2.5 million to either EUR 32.0 million or EUR 50.0 million, the MFF size can be increased or reduced to provide credit enhancement to the SFF. In post-pricing scenarios, both the SFF and MFF 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 400 million, which constitutes either a SFF size of EUR 329.0 million, an MFF size of EUR 69.0 million and a remainder of EUR 32.0 million in equity, or a SFF size of EUR 310.0 million, an MFF size of EUR 40.0 million and a remainder of EUR 50.0 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 ratings of the Facilities are based on DBRS’s review of the above-mentioned factors and the following analytical considerations:

-- The transaction structure including 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 revolving 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 the Borrower, the CM and the Senior and Mezzanine 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 data and information available to it for the purposes of providing these ratings to be of satisfactory quality.

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

These ratings concern newly issued financial instruments. These are the first DBRS ratings on these financial instruments.

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”):

EUR 32.0 million equity Drawdown Structure:
(1) For the first drawing point in a post-pricing scenario, warehouse notional is expected to be EUR 130 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 the last drawing point in a post-pricing scenario, warehouse notional is expected to be EUR 400 million.
-- An increase in the Risk Score by 15% will have no impact on the current rating of the SFF, whereas it would lead to a downgrade of the MFF to BB (high) (sf).
-- An increase in the Risk Score by 30% would lead to a downgrade of the SFF to BBB (high) (sf), and it would lead to a downgrade of the MFF to BB (low) (sf).

EUR 50.0 million equity Drawdown Structure:
(1) For the first drawing point in a post-pricing scenario, warehouse notional is expected to be 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 the Risk Score by 30% will would lead to a downgrade of the SFF to A (low) (sf), whereas it would have no impact on the current rating of the MFF.

(2) For the last drawing point in a post-pricing scenario, warehouse notional is expected to be EUR 400 million.
-- An increase in the Risk Score by 15% will have no impact on the current rating of the SFF, whereas it would lead to a downgrade of the MFF to BB (high) (sf).
-- An increase in the Risk Score by 30% would lead to a downgrade of the SFF to A (low), and it would lead to a downgrade of the MFF to BB (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 and US regulations only.

Lead Analyst: Joana Seara da Costa, Assistant Vice President
Rating Committee Chair: Jerry van Koolbergen, Managing Director
Initial Rating Date: 21 March 2018

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor, London EC3M 3BY United Kingdom
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.