DBRS Morningstar Confirms Rating of Class A Notes Issued by CBAM 2018-5, Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed its rating of AAA (sf) on the Class A Notes (the Notes) issued by CBAM 2018-5, Ltd. as the Issuer and CBAM 2018-5, LLC as the Co-Issuer (together, with the Issuer, the Co-Issuers).

The rating on the Notes was issued pursuant to the Indenture, dated as of March 29, 2018, between the Co-Issuers and U.S. Bank National Association (rated AA (high) with a Stable trend by DBRS Morningstar), as the Trustee.

The rating on the Notes addresses the timely payment of interest and the ultimate payment of principal in accordance with the terms of the Indenture referred to above.

The Notes issued by the Co-Issuers are collateralized primarily by a portfolio of U.S. senior secured floating-rate broadly syndicated corporate loans. The collateralized loan obligation (CLO) is managed by The Carlyle Group (Carlyle), which acquired the preceding Collateral Manager, CBAM CLO Management, LLC (CBAM). DBRS Morningstar considers Carlyle to be an acceptable CLO manager.

RATING RATIONALE
The rating action is a result of the annual surveillance review of the transaction. DBRS Morningstar confirmed the ratings on the Notes as the current transaction performance is within DBRS Morningstar’s expectation. The Stated Maturity is April 17, 2031. The Reinvestment Period ends on April 17, 2023.

In its analysis, DBRS Morningstar considered the following aspects of the transaction:

(1) The transaction’s capital structure and the form and sufficiency of available credit enhancement.
(2) Relevant credit enhancement in the form of subordination and excess spread.
(3) The ability of the Notes to withstand projected collateral loss rates under various cash flow stress scenarios.
(4) The credit quality of the underlying collateral and the ability of the transaction to reinvest Principal Proceeds into new Collateral Obligations, subject to the Eligibility Criteria, which include testing the Concentration Limitations, Collateral Quality Tests, and Coverage Tests.
(5) DBRS Morningstar’s assessment of the origination, servicing, and CLO management capabilities of Carlyle as the Collateral Manager.

The transaction has a dynamic structural configuration that is used to determine which of the row/column combinations (each, a Matrix Case) are applicable for the purpose of determining compliance with the Matrix Tests, as set forth in Section 7.17(f) of the Indenture. Depending on a given Diversity Score, the following metrics are selected accordingly from the applicable row of the Asset Quality Matrix: Weighted Average Spread, Adjusted Weighted Average Moody’s Rating Factor (WARF). DBRS Morningstar converted the WARF constraints to the DBRS Risk Score using linear interpolation and analyzed each structural configuration as a unique transaction. The Collateral Quality Tests that DBRS Morningstar modeled during its analysis are presented below:

(1) Minimum Floating Spread Test: 3.25%
(2) Minimum Weighted Average Moody’s Recovery Rate Test: 43.0%
(3) Maximum Coupon Test: 7%
(4) Moody’s Diversity Test: 82
(5) Maximum Moody’s Rating Factor Test: 2943
(6) Weighted-Average Life Test: 4.44

Some particular strengths of the transaction are (1) collateral quality that consists of at least 90% senior-secured floating-rate broadly-syndicated loans; (2) the adequacy of cash collected from the collateral to pay the interest; and (3) the strong diversification of underlying obligations. Some challenges were identified as follows: (1) up to 60% of the portfolio pool may consist of Cov-lite Loans; (2) the underlying collateral portfolio may be insufficient to redeem the Notes in an Event of Default.

The transaction is performing according to the contractual requirements of the Indenture. As of November 14, 2022, the Borrower is in compliance with all Coverage and Collateral Quality Tests, as well as the Concentration Limitation tests. There were around $7.20 million in defaulted obligations registered in the underlying portfolio as of November 14, 2022. The Overcollateralization test would still pass with the defaulted obligations carried at zero value.

DBRS Morningstar modeled the transaction using its proprietary cash flow engine and the DBRS Morningstar CLO Asset model. DBRS Morningstar used its predictive model (the publicly available CLO Asset Model) to determine a ratings-based pool default-rate (the Stressed Default Rate) which can be equated with a certain credit rating. Based on inputs into the predictive model, such as obligor credit quality, obligor and industry diversification and term to maturity, the predictive model generated a level of cumulative default stress appropriate for each rating category. DBRS Morningstar then performed cash flow analysis using a proprietary cash flow engine, which incorporated inputs such as the Stressed Default Rate, as well as assumptions relating to principal amortization, amount of interest generated, default timing, recoveries and movement in interest rate curves, among other considerations. The output of this cash flow analysis is referred to as the break-even default rate (BDR).

DBRS Morningstar assigns ratings based on a comparison of the BDR results of the cash flow analysis as it compares to the Stressed Default Rate output from the default probability model. Model-based analysis produced satisfactory results that supported the above assigned ratings on the Notes.

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

The transaction assumptions consider DBRS Morningstar’s baseline macroeconomic scenarios for rated sovereign economies, available in its commentary “Baseline Macroeconomic Scenarios for Rated Sovereigns: September 2022 Update,” published on September 19, 2022 (https://www.dbrsmorningstar.com/research/402907). These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse Coronavirus Disease (COVID-19) pandemic scenarios, which were first published in April 2020.

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

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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

The principal methodologies are Rating CLOs and CDOs of Large Corporate Credit (January 26, 2022) and Cash Flow Assumptions for Corporate Credit Securitizations (January 26, 2022), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

The DBRS Morningstar Sovereigns group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts with the baseline scenarios set forth in the following report: https://www.dbrsmorningstar.com/research/402907.

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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