DBRS Confirms and Upgrades Ratings on Certain Tranches and Muskoka 2018-1 Notes Issued by Manitoulin USD Limited

DBRS, Inc. (DBRS) confirmed its provisional rating on the Tranche A Amount at AAA (sf) as well as upgraded its provisional ratings on the Tranche B Amount to AA (sf) from A (sf) and the Tranche C Amount to A (low) (sf) from BBB (low) (sf) (collectively, the Tranche Amounts) of two unexecuted, unfunded financial guarantees (the Financial Guarantees) with respect to a portfolio of primarily U.S. and Canadian senior secured or senior unsecured loans originated or managed by Bank of Montreal (BMO; rated AA with a Stable trend by DBRS) and issued by Manitoulin USD Limited (Manitoulin).

The provisional ratings on the Tranche Amounts address the likelihood of a reduction to the respective Tranche Amounts caused by a Tranche Loss Balance on each respective tranche resulting from defaults and losses within the guaranteed portfolio during the period from the Effective Date until the Scheduled Termination Date (as defined in the Financial Guarantees).

The ratings assigned by DBRS are expected to remain provisional until the underlying agreements are executed. BMO may have no intention of executing the Financial Guarantees. DBRS will maintain and monitor the provisional ratings throughout the life of the transaction or while it continues to receive performance information.

DBRS also upgraded its ratings on the Muskoka Series 2018-1 Class B Guarantee Linked Notes (the Class B Notes) to AA (sf) from A (sf); the Muskoka Series 2018-1 Class C Guarantee Linked Notes (the Class C Notes) to A (low) (sf) from BBB (low) (sf); and the Muskoka Series 2018-1 Class D Guarantee Linked Notes (the Class D Notes; together with the Class B Notes and Class C Notes, the Notes) to BB (high) (sf) from BB (sf). The Notes were issued by Manitoulin referencing the executed Junior Loan Portfolio Financial Guarantee (the Junior Financial Guarantee) dated as of September 27, 2018, between Manitoulin as Guarantor and BMO as Beneficiary with respect to a portfolio of primarily U.S. and Canadian senior secured and senior unsecured loans.

The ratings on the Notes address the timely payment of interest and ultimate payment of principal on or before the Scheduled Termination Date (as defined in the Junior Financial Guarantee). The payment of the interest due to the Notes is subject to the Beneficiary’s ability to pay the Guarantee Fee Amount (as defined in the Junior Financial Guarantee).

To assess portfolio credit quality, for each corporate obligor in the portfolio DBRS relies on DBRS ratings and public ratings from other rating agencies or DBRS may provide a credit estimate, internal assessment or ratings mapping of the Beneficiary’s internal ratings model. Credit estimates, internal assessments and ratings mappings are not ratings; rather, they represent an abbreviated analysis, including model-driven or statistical components of default probability for each obligor used in assigning a rating to the facility that is sufficient to assess portfolio credit quality.

The ratings reflect the following:
(1) The draft Financial Guarantees and Junior Financial Guarantees.
(2) The integrity of the transaction structure.
(3) DBRS’s assessment of the portfolio quality.
(4) Adequate credit enhancement to withstand projected collateral loss rates.

DBRS notes that the above press release was amended on January 7, 2020, to remove an unnecessary disclosure. The amendment was minor and would not impact the understanding of the reader.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodologies are Rating CLOs and CDOs of Large Corporate Credit and Mapping Financial Institution Internal Ratings to DBRS Ratings for Global Structured Credit Transactions, which can be found on dbrs.com under Methodologies & Criteria.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

This rating is endorsed by DBRS Ratings Limited for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

Each of the principal asset class methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, for the recovery rate, DBRS applied the senior secured and senior unsecured recovery rates defined in its “Rating CLOs and CDOs of Large Corporate Credit” methodology. DBRS applies different recovery rates depending on the recovery tier and seniority.

DBRS used its CLO Asset Model to determine expected default rates for the portfolio at each rating level. To determine the credit risk of each underlying reference obligation, DBRS relied on either public ratings or a ratings mapping to DBRS ratings of the Bank of Montreal’s internal ratings models. The mapping was completed in accordance with DBRS’s “Mapping Financial Institution Internal Ratings to DBRS Ratings for Global Structured Credit Transactions” methodology.
The last rating action on this transaction took place on September 27, 2018, when DBRS finalized its provisional ratings on the Muskoka Series 2018-1 Class B, Class C and Class D Guarantee Linked Notes.

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: Arthur Krivoruk, Financial Analyst, U.S. Structured Credit – Global Structured Finance
Rating Committee Chair: Jerry van Koolbergen, Managing Director, Head of U.S. Structured Credit
Initial Rating Date: September 24, 2018.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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