DBRS Finalises Provisional Ratings on Cairn CLO X B.V.

DBRS, Inc. (DBRS) finalised its provisional ratings on the Senior Funding Facility (SFF) and the Mezzanine Funding Facility (MFF; together, the Facilities) of Cairn CLO X B.V. (the Borrower) as follows:

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

The finalised ratings of the Facilities are being assigned pursuant to the Warehouse Deed, dated as of 22 December 2017, by and among the Borrower; Barclays Bank PLC as Senior Lender and Mezzanine Lender; Cairn Loan Investments LLP (CLI) as Collateral Manager; Elavon Financial Services DAC as Facility Agent, Collateral Administrator, Custodian, and Account Bank; U.S. Bank, National Association as Note Registrar; and US Bank Trustees Limited as Security Trustee, among other parties.

The rating on the SFF addresses the timely payment of interest and the ultimate payment of principal payable on or before the Warehouse Maturity Date in December 2030. The rating on the MFF addresses the ultimate payment of interest and the ultimate payment of principal payable on or before the Warehouse Maturity Date in December 2030.

The Borrower is a private company with limited liability 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 Collateral Quality and Portfolio Profile Tests. Cairn Loan Investments LLP will act as the Borrower’s Collateral Manager (CM).

As of 26 March 2018, the transaction portfolio consists of EUR 87.89 million of collateral obligations extended to 25 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 PLC (Barclays; Senior and Mezzanine Lender; 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 will continue to monitor the transaction as part of ongoing surveillance.

The warehouse has a 12-month ramp-up period followed by an amortisation period. The warehouse will reach its maturity date at the earlier of the CLO Closing Date, or other date determined by the CM where final payment on the collateral is received by the Borrower or December 2030.

An early maturity date can be caused by a Mandatory Early Redemption Date, an Optional Early Maturity Date (no earlier than 12 months after the reinvestment period end date) or at the sole option of the Instructing Investor (Barclays) following an event of default (EOD). Under the Warehouse Deed, upon an occurrence of (and during the continuation of) an EOD, the Instructing Investor may, in its sole option, elect to liquidate the portfolio, which could adversely affect the Mezzanine Lenders and potentially affect ratings volatility on the Mezzanine Funding Facility.

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 the 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, and the CM will operate the Borrower’s 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 September 2015 in London, with a refresh operational review via email in December 2017. The objective of the operational review was to assess the adequacy of the CM’s infrastructure and internal processes used to support investment decisions and portfolio monitoring. DBRS considers the origination and servicing practices of the CM to be consistent with current market practices as a whole.

DBRS has analysed a covenant matrix structure where the total warehouse notional will be up to EUR 350 million with the equity notional of EUR 40 million. The first drawing point in a post-pricing scenario is expected to have total capitalisation of EUR 170 million, which constitutes an SFF size of EUR 120 million, an MFF size of EUR 10 million and the remaining EUR 40 million in equity. In pre-pricing scenarios, as the equity size gradually increases to EUR 40 million from EUR 5 million, the MFF size can be increased or reduced to provide credit enhancement to the SFF. In post-pricing scenarios, both SFF and MFF increase in size, and the relative credit enhancement decreases. 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. The maximum notional of the warehouse in the post-pricing scenario would be up to EUR 350 million, which constitutes an SFF size of EUR 268 million, an MFF size of EUR 42 million and a remainder of EUR 40 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, 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 350 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 the DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” found at http://www.dbrs.com/industries/bucket/id/10036/name/commentaries.

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.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

This rating was initiated at the request of the rated entity.

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.

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

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.

Lead Analyst: Leila Manii, Assistant Vice President
Rating Committee Chair: Jerry van Koolbergen, Managing Director
Initial Rating Date: 05 January 2018

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.