DBRS Morningstar Assigns New Ratings to U.S. CLOs Backed by Broadly Syndicated Bank Loans

DBRS, Inc. (DBRS Morningstar) assigned ratings to the following eight collateralized loan obligation (CLO) issuers:

AIG CLO 2018-1, Ltd
-- Class A-1 Notes, CUSIP 00140RAA9
-- Collateral Manager: AIG Asset Management (U.S.), LLC
-- New Rating: AAA, Under Review – Analytical Integration Review (UR-AIR)

AIG CLO 2019-1, Ltd
-- Class A Notes, CUSIP 00871PAA8
-- Collateral Manager: AIG Asset Management (U.S.), LLC
-- New Rating: AAA, UR-AIR

Ares XLVI CLO Ltd
-- Class A-1 Notes, CUSIP 04016UAC1
-- Collateral Manager: Ares CLO Management LLC
-- New Rating: AAA, UR-AIR

Ares XXXIR CLO Ltd
-- Class A-1 Notes, CUSIP 04017TAA7
-- Collateral Manager: Ares CLO Management LLC
-- New Rating: AAA, UR-AIR

CBAM 2018-5, Ltd
-- Class A Notes, CUSIP 12481QAC9
-- Collateral Manager: CBAM CLO Management LLC
-- New Rating: AAA, UR-AIR

Parallel 2018-2 Ltd
-- Class A-1 Notes, CUSIP 69916DAA7
-- Collateral Manager: DoubleLine Capital LP
-- New Rating: AAA, UR-AIR

Peaks CLO 3, Ltd
-- Class A-1 Notes, CUSIP 70469FAC7
-- New Rating: AAA, UR-AIR

-- Class A-2 Notes, CUSIP 70469FAL7
-- New Rating: AAA, UR-AIR
-- Collateral Manager: ArrowMark Colorado Holdings LLC

Signal Peak CLO 6, Ltd
-- Class A Notes, CUSIP G61009AA7
-- Collateral Manager: Orix Advisers
-- New Rating: AAA, UR-AIR

The rating on each of the notes listed above addresses the timely payment of interest and the ultimate payment of principal in accordance with each of the notes’ transaction documentation.

DBRS Morningstar has also placed each of the notes listed above Under Review – Analytical Integration Review, because DBRS Morningstar recently closed the request for comment period on and finalized its methodologies “Rating CLOs and CDOs of Large Corporate Credit” and “Cash Flow Assumptions for Corporate Credit Securitizations.”

The ratings will remain Under Review – Analytical Integration Review until such time that DBRS Morningstar applies its “Rating CLOs and CDOs of Large Corporate Credit,” “Cash Flow Assumptions for Corporate Credit Securitizations,” and “Operational Risk Assessment for Collateralized Loan Obligation (CLO) and Collateralized Debt Obligation (CDO) Managers of Large Corporate Credits” methodologies (collectively, the DBRS Morningstar CLO Methodologies) and takes any related rating actions. Thereafter, DBRS Morningstar will monitor these ratings in accordance with the DBRS Morningstar CLO Methodologies.

The ratings on the notes, so long as they remain Under Review – Analytical Integration Review and are monitored in accordance with the MCR U.S. CLO Methodologies, may not be of comparable credit quality as the DBRS Morningstar ratings on other outstanding U.S. CLO transactions assigned or monitored, as applicable, in accordance with the DBRS Morningstar CLO Methodologies. Accordingly, DBRS Morningstar’s placement of the relevant ratings Under Review – Analytical Integration Review, similar to the use of other review status designations by DBRS Morningstar, when appropriate, may indicate a difference in the credit quality of the ratings compared with other DBRS Morningstar ratings that are not under review.

These notes are currently also rated by our affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these notes Under Review – Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about October 15, 2020. In accordance with MCR’s engagement letter covering these notes, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.

The ratings on the Notes reflect the analysis MCR has done historically in accordance with its U.S. CLO Ratings Methodology (September 2020) and U.S. ABS General Ratings Methodology (September 2020) (collectively, the MCR U.S. CLO methodologies) and an operational review DBRS Morningstar conducted on the investment manager of the transaction.

Accordingly, the above DBRS Morningstar CLO ratings reflect the following:

(1) DBRS Morningstar’s analysis was based on the related rating analysis performed by MCR on the CLOs on or prior to the closing date:
(a) The related analysis considered the legal structure and credit quality of each CLO.
(b) The related analysis also included an evaluation of the transaction cash flow using an analytical tool. This analysis determines the ability of any rated note to sustain a rating-specific target conditional default rate, called the Adjusted Target Break-Even Conditional Default Rate (CDR). The related analysis begins with its Base-Case Target CDR, specific to a given rating level, which the notes need to sustain to achieve that rating; this assumes a diversified pool with a weighted-average credit rating of B. This CDR is adjusted based on the actual pool characteristics such as the weighted-average rating factor (WARF), diversity, and the CLO collateral manager’s past performance and relative operational ability to account for higher or lower risk compared with the base-case portfolio. Upon analyzing the transaction, if the notes’ break-even CDR is found to be higher than the Adjusted Target Break-Even CDR calculated above, the notes pass that rating stress.

(2) DBRS Morningstar notes that a legal analysis, which included but was not limited to legal opinions and various transaction documents, was performed by MCR, who also engaged external counsel as part of its process of assigning new ratings to the CLOs on or prior to the closing date. For the purpose of assigning new ratings to the transaction, DBRS Morningstar did not perform additional legal analysis unless otherwise indicated in this press release.

(3) DBRS Morningstar’s assessment of the origination, servicing, and CLO management capabilities of the CLO collateral manager.

(4) DBRS Morningstar reviewed key transaction performance indicators reported in periodic remittance reports since the closing date.

COLLATERAL
Each note listed above is collateralized primarily by a portfolio of U.S. senior secured floating-rate broadly syndicated corporate loans.

CASH FLOW ANALYSIS
The key assumptions in the cash flow analysis include the WARF, diversity score, recovery rate, and CLO collateral manager adjustment.

DBRS Morningstar will continue to monitor this transaction in accordance with its “U.S. CLO Ratings Methodology” and “U.S. ABS General Ratings Methodology.” Any subsequent rating actions will be published in a press release and will be available on DBRS Morningstar’s website.

For more information, please refer to DBRS and Morningstar Credit Ratings (MCR) Provide Additional Information on Legacy MCR-Rated U.S. CLOs Collateralized by Broadly Syndicated Bank Loans.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

As the Coronavirus Disease (COVID-19) spread around the world, certain countries imposed quarantines and lockdowns, including the United States, which accounts for more than one fourth of confirmed cases worldwide. The coronavirus pandemic has negatively affected not only the economies of the nations most afflicted, but also the overall global economy with diminished demand for goods and services as well as disrupted supply chains. The effects of the pandemic may result in deteriorated financial conditions for many companies and obligors, some of which will experience the effects of such negative economic trends more than others. At the same time, governments and central banks in multiple regions, including the United States and Europe, have taken significant measures to mitigate the economic fallout from the coronavirus pandemic.

In conjunction with DBRS Morningstar’s commentary, “Global Macroeconomic Scenarios: Implications for Credit Ratings,” published on April 16, 2020, and updated on September 10, 2020, DBRS Morningstar further considers additional adjustments to assumptions for the CLO asset class that consider the moderate economic scenario outlined in the commentary. The adjustments include a higher default assumption for the weighted-average credit quality of the current collateral obligation portfolio. To derive the higher default assumption, DBRS Morningstar notches ratings for obligors in certain industries and obligors at various rating levels based on their perceived exposure to the adverse disruptions caused by the coronavirus. Considering a higher default assumption would result in losses that exceed the original default expectations for the affected classes of notes. DBRS Morningstar may adjust the default expectations further if there are changes in the duration or severity of the adverse disruptions.

For more information regarding DBRS Morningstar’s simplified set of macroeconomic scenarios for select economies related to the coronavirus, please see its April 16, 2020, commentary “Global Macroeconomic Scenarios: Implications for Credit Ratings” at https://www.dbrsmorningstar.com/research/359679; its April 22, 2020, commentary “Global Macroeconomic Scenarios: Application to Credit Ratings” at https://www.dbrsmorningstar.com/research/359903; and its September 10, 2020, updated commentary “DBRS Morningstar: Global Macroeconomic Scenarios: September Update” at https://www.dbrsmorningstar.com/research/366543.

For more information regarding DBRS Morningstar’s additional adjustment for select industries related to the coronavirus, please see its May 18, 2020, commentary, “CLO Risk Exposure to the Coronavirus Disease (COVID-19)” at https://www.dbrsmorningstar.com/research/361112/clo-risk-exposure-to-the-coronavirus-disease-covid-19.

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

The principal methodologies are U.S. CLO Ratings Methodology (October 13, 2020) and U.S. ABS General Ratings Methodology (September 25, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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