DBRS Confirms Ratings on Jubilee CLO 2019-XXII B.V.

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 Jubilee CLO 2019-XXII B.V. (the Borrower) following amendments to the warehouse structure, which became effective on 29 April 2019, as follows:

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

The rating on the SFF addresses the timely payment of interest and the ultimate payment of principal payable on or before the warehouse termination date in June 2031. The rating on the MFF addresses the ultimate payment of interest and principal payable on or before the warehouse termination date in June 2031.

The Borrower is a limited liability company incorporated under the laws of the Netherlands. Effective from 27 March 2019, the borrower name was changed from Jubilee CLO 2018-XXII B.V. to Jubilee CLO 2019-XXII B.V. 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. Alcentra Limited acts as the Borrower’s Collateral Manager (CM).

As of 11 April 2019, the transaction portfolio consisted of EUR 259.8 million of collateral obligations extended to 97 unique borrowers and 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 was established in July 2018 and included a 12-month reinvestment period followed by an amortisation period. DBRS’s analysis assumes a term structure with the warehouse reaching its maturity date on 30 June 2031.

The Bank of New York Mellon - London Branch (rated AA with a Positive 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 As per the transaction documentation, if the rating of the Account Bank is either withdrawn or downgraded below “A”, such entity must be replaced within 30 calendar days by a financial institution with a DBRS public rating of “A”.

On 29 April 2019, the transaction parties signed a Deed of Amendment to implement the following changes on the transaction:

-- Decrease in the total matrix points of the warehouse.
-- Amendments to the capital structure and collateral quality tests (CQTs).

Currently, the total capitalisation of EUR 400 million consists of an SFF size of EUR 308 million, an MFF size of EUR 42 million and EUR 50 million in equity, which remains unchanged following the amendment. Following the amendment, the number of matrix points between total capitalization EUR 200 million and EUR 400 million is reduced. Additionally, the CQTs have been amended throughout the structure.

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. Most of 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 the transaction’s 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.

At the time of the initial ratings, 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 9 July 2018, when DBRS finalised its provisional ratings.

The lead analyst responsibilities for this transaction have been transferred to Francis Quagraine.

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):

(1) For the matrix point of EUR 200 million total warehouse capitalisation:
-- An increase in the Risk Score by 15% would lead to a downgrade of the SFF to BBB (high) (sf), and 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 no impact on the current rating of the MFF.

(2) For the matrix point of EUR 400 million total warehouse capitalisation:
-- An increase in the Risk Score by 15% would lead no impact on the current rating of the SFF, and 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 A (low) (sf) and would lead to a downgrade of the MFF to BB (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: Francis Quagraine, Financial Analyst
Rating Committee Chair: Jerry van Koolbergen, Managing Director
Initial Rating Date: 9 July 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
-- Master European Structured Finance Surveillance Methodology
-- 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.