DBRS Finalises Provisional Ratings of Anchorage Capital Europe CLO 3 DAC

DBRS Ratings Limited (DBRS) finalised the provisional ratings previously assigned to the Senior Funding Facility (SFF) and the Mezzanine Funding Facility (MFF; together with the SFF, the Facilities) of Anchorage Capital Europe CLO 3 DAC (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 on 18 September 2031. The rating on the MFF addresses the ultimate payment of interest and principal payable on or before the Warehouse Termination Date. DBRS finalised its provisional ratings previously assigned on 21 September 2018 as the aggregate principal balance of the assets (based on committed trades) in the warehouse reached over EUR 65 million (as per Clause 6.3 (d) of the Warehouse Deed), and all collateral quality and portfolio profile tests are in compliance.

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. Anchorage Capital Group, L.L.C. acts as the Borrower’s Collateral Manager (CM).

As of 7 March 2019, the transaction portfolio consisted of EUR 92 million of collateral obligations extended to 33 borrowers. 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; rated “A” with a Stable trend by DBRS) will continue to fund the Facilities upon the Borrower’s request.

The warehouse has a 24-month reinvestment period followed by an amortisation period. The warehouse will reach its maturity date at the earliest of the CLO closing date, the final distribution date or 18 September 2031.

The Bank of New York Mellon, London branch acts as the Account Bank and the CM operates the bank accounts. As per the transaction documentation, if the rating of the Account Bank is either withdrawn or downgraded below “A”, the entity must be replaced within 30 calendar days by a financial institution with a DBRS public rating of “A”.

DBRS analysed four covenant matrix schedules (A, B, C and D) where the warehouse notional amount will total EUR 400 million with the equity notional amount increasing to EUR 52 million. The last drawing point in a pre-pricing scenario is expected to have total capitalisation of EUR 200 million, which constitutes a SFF size of EUR 150 million, a MFF size of EUR 10 million and the remaining EUR 40 million in equity for all the structures. In pre-pricing scenarios, 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. 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. Schedule A, B and C differ from one other in weighted-average life (WAL) and WA Risk Score (WARS), all else being equal. Schedule D differs in WAL compared with Schedule A and C and differs in weighted-average size (WAS) and WARS with Schedule B, all else being equal. The CM has the flexibility to linearly interpolate between the WAS and WARS of Schedule B and D as long as all other drawing balances and covenants are the same. DBRS has further incorporated this trade-off between WAS and WARS in its analysis.

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 or hurdle rates at each rating stress level. Breakeven 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) publicly available obligor ratings from other nationally recognised statistical rating organisations when DBRS ratings are not available; and (3) information from the CM that allows DBRS to complete the credit estimate when no public ratings are available.

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. The portfolio profile tests are set at a portfolio notional amount 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: https://www.dbrs.com/research/333487/rating-sovereign-governments

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”):

Structure A
(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 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 (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 SFF but 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) (sf) and a downgrade of the MFF to BB (low) (sf).

Structure B
(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 A (low) (sf) but 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 (high) (sf) but have no impact on the current rating of the MFF.

(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 SFF but would lead to a downgrade of the MFF to BB (high) (sf).
-- An increase in the Risk Score by 30% would have no impact on the SFF but would lead to a downgrade of the MFF to BB (sf).

Structure C
(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 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 lead to a downgrade of the SFF to BBB (high) (sf) but have no impact on the current rating of the MFF.

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

Structure D
(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 have no impact on the SFF or the current rating of the MFF.
-- An increase in the Risk Score by 30% would lead to a downgrade of the SFF to A (low) (sf) but have no impact on the current rating of the MFF.

(2) For the last matrix point in a post-pricing scenario, warehouse notional is expected to be EUR 400 million.
-- An increase in the Risk Score by 15% would have no impact on the current rating of SFF or the MFF.
-- An increase in the Risk Score by 30% would have no impact on the current rating of the SFF but would lead to a downgrade of the MFF to BBB (high) (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: Mudasar Chaudhry, Vice President
Rating Committee Chair: Jerry van Koolbergen, Managing Director
Initial Rating Date: 21 September 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.

This press release was amended on 25 March 2019 to include the following missing disclosure: "DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis."