DBRS Confirms Ratings of Harvest CLO XXI D.A.C. Following Amendments

DBRS Ratings Limited (DBRS) confirmed its ratings on the Senior Funding Facility (SFF) and the Mezzanine Funding Facility (MFF; together with the SFF, the Facilities) of Harvest CLO XXI D.A.C. (the Borrower):

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

The rating on the SFF addresses the timely payment of interest and ultimate payment of principal payable on or before the Warehouse Termination Date of 15 July 2031. The rating on the MFF addresses the ultimate payment of interest and principal payable on or before the Warehouse Termination Date.

The confirmations follow a review of the transaction based on the amendments that became effective on 20 February 2019. The amendments include changes to the capital structure (matrix) and the collateral quality tests.

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 collateralised by a portfolio of leveraged loans and high-yield bonds, subject to collateral quality and portfolio profile tests. Investcorp Credit Management EU Limited acts as the Borrower’s Collateral Manager (CM).

As of 14 February 2019, the transaction portfolio consisted of EUR 301.4 million of collateral obligations extended to 98 borrowers.

DBRS analysed a covenant matrix structure where the warehouse notional amount will total EUR 400 million with the equity notional amount increasing to EUR 50 million. The last drawing point in a pre-pricing scenario is expected to have total capitalisation of EUR 400 million, which constitutes an SFF size of EUR 300 million, an MFF size of EUR 50 million and the remaining EUR 50 million in equity. In pre-pricing scenarios, the equity size gradually increases to EUR 30 million from EUR 1 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 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.

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 continues to be 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/333487/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.

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 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.

The last rating action on this transaction took place on 1 October 2018, when DBRS finalised its provisional ratings on the Facilities.

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:
(1) For the first matrix point in a post-pricing scenario, the warehouse notional amount is expected to be EUR 210 million.
-- An increase in the Risk Score by 15% would lead to a downgrade of the SFF to BBB (high) (sf) but would have no impact on the current rating of the MFF.
-- An increase in the Risk Score by 30% would lead to a downgrade of the SFF to BBB (low) (sf) and a downgrade of the MFF to BB (high) (sf).

(2) For the last matrix point in a post-pricing scenario, the warehouse notional amount is expected to be EUR 400 million.
-- An increase in the Risk Score by 15% would have no impact on the current rating of the SFF or the current rating of the MFF.
-- An increase in the Risk Score by 30% would have no impact on the current rating of the SFF or the current rating of the MFF.

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, Senior Vice President
Rating Committee Chair: Jerry van Koolbergen, Managing Director
Initial Rating Date: 29 August 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.