DBRS Morningstar Finalises Provisional Ratings of Man GLG Euro CLO VI DAC

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional ratings following an amendment of the Senior Funding Facility (SFF) and the Mezzanine Funding Facility (MFF; together with the SFF, the Facilities) of Man GLG Euro CLO VI DAC (the Borrower) as follows:

-- SFF rated A (low) (sf)
-- MFF rated BB (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 MFF addresses the ultimate payment of interest and principal payable on or before the Warehouse Maturity Date. DBRS Morningstar is finalising the provisional ratings as the aggregate principal balance of the assets (based on committed trades) in the warehouse reached over EUR 60 million in accordance with the applicable matrix cases. The provisional ratings were assigned on 31 January 2019 with the MFF having a rating of BBB (low) at the time. As a result of amendments to warehouse deed that were executed on 18 September 2019, the finalised rating of the MFF will be BB (high). The lower rating reflects DBRS Morningstar’s analysis of amendments of reduction in the credit enhancement, changes to both the Collateral Quality Tests (CQTs) and drawdown structure.

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 CQTs and portfolio profile tests. GLG Partners LP acts as the Borrower’s Investment Manager.

As of 8 October 2019, the transaction portfolio consisted of EUR 136 million of collateral obligations extended to 52 borrowers. The Borrower will continue to draw on the Facilities based on the advanced rates predetermined in the deed. 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 Morningstar) 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 earliest of the CLO Closing Date, an Early Redemption Date, the Final Distribution Date or December 2033.

Elavon Financial Services DAC, U.K. branch will act as the Account Bank and the collateral manager (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”, the entity must be replaced within 30 calendar days by a financial institution with a DBRS Morningstar public rating of “A”.

DBRS Morningstar analysed an advanced rate covenant matrix structure where the warehouse notional amount will total EUR 400 million with the equity notional amount varying between 10% and 25% of the commitment amount at different points in the structure. The last drawing point in the covenant matrix is expected to have a total capitalisation of EUR 400 million, which constitutes an SFF size of 80% of the total capitalisation, an MFF size of EUR 10% of the total capitalisation, and the remaining 10% in equity. 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 Morningstar recovery rate, weighted-average (WA) spread and WA coupon also change.

DBRS Morningstar 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 Morningstar’s “Cash Flow Assumptions for Corporate Credit Securitizations” methodology.

For the underlying collateral analysis, DBRS Morningstar 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 Morningstar ratings are not available; and (3) the necessary information to complete the credit estimate from the CM, if no public ratings are available.

The ratings of the Facilities are based on DBRS Morningstar’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 Morningstar 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 Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.

The transaction structure was analysed in the DaVinci cash flow engine, considering the default rates at which the rated notes did not return all specified cash flows.

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 Morningstar 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 “Global Methodology for Rating Sovereign Governments” at: https://www.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for this rating include the Borrower, the CM and the Senior and Mezzanine Lender.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar was supplied with one or more third-party assessments. DBRS Morningstar applied additional cash flow stresses in its rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.

This is the first rating action since the Initial Rating Date.

The last rating action on this transaction took place on 31 January 2019 when the provisional ratings were assigned.

Information regarding DBRS Morningstar 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 Morningstar 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 200 million.
-- An increase in the Risk Score by 15% would have no impact to the rating of the SFF, and would lead to a downgrade of the MFF to BB (sf).
-- An increase in the Risk Score by 30% would lead to a downgrade of the SFF to BBB (high) (sf) and a downgrade of the MFF to BB (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 lead to a downgrade of the SFF to BBB (high) (sf) and would lead to a downgrade of the MFF to BB (low) (sf).
-- 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 B (sf).

For further information on DBRS Morningstar 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: 31 January 2019

DBRS Ratings Limited
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London EC3M 3BY United Kingdom
Registered and incorporated under the laws of England and Wales: Company 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
-- Operational Risk Assessment for (CLO) and (CDO) Managers of Large Corporate Credits

A description of how DBRS Morningstar 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 [email protected].