DBRS Assigns Provisional Ratings to Cadogan Square CLO XIII D.A.C.

DBRS Ratings Limited (DBRS) assigned the following provisional ratings to the Senior Funding Facility (SFF) and the Senior Mezzanine Funding Facility (SMFF; together with the SFF, the Facilities) of Cadogan Square CLO XIII D.A.C. (the Borrower):

-- SFF rated A (high) (sf)
-- SMFF rated BBB (high) (sf)

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

The provisional ratings will only be finalised once the aggregate principal balance of the assets (based on committed trades) in the warehouse has reached EUR 62.5 million, and all collateral quality and portfolio profile tests are in compliance. The warehouse documents were executed on 13 September 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. Credit Suisse Asset Management Limited will act as the Borrower’s Collateral Manager (CM).

As of the provisional rating, the transaction portfolio had no collateral obligations and 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 will continue to fund the Facilities upon the Borrower’s request.

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, an Early Redemption Date or September 2031.

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 As per the transaction documentation, if the rating of the Account Bank is either withdrawn or downgraded below “A”, such entity must be replaced within 30 calendar days by a financial institution with a DBRS public rating of “A”.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 analysed a covenant matrix structure where the total warehouse notional will total EUR 200 million with the equity notional increasing to EUR 50 million. The last drawing point in the covenant matrix is expected to have a total capitalisation of EUR 200 million, which constitutes an SFF size of EUR 145 million, an SMFF size of EUR 5 million and the remaining EUR 50 million in equity. The equity size gradually increases to EUR 50 million from EUR 2.5 million. The SMFF 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 analysis 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, the CM will provide the necessary information to DBRS to complete the Credit Estimate.

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. The portfolio profile tests are set at a portfolio notional of EUR 400 million at all times and DBRS created stressed 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 ratings 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 these ratings 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”):

Drawdown Structure of total EUR 400 million warehouse:
For the last matrix point, warehouse notional is expected to be EUR 200 million.
-- An increase in the Risk Score by 15% would lead to a downgrade of the SFF to A (low), and would have no impact on the current rating of the SMFF.
-- An increase in the Risk Score by 30% would lead to a downgrade of the SFF to BBB (high), and would have no impact on the current rating of the SMFF.

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: October 4, 2018

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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.