DBRS Morningstar Confirms Rating on the Class A Notes Issued by Signal Peak CLO 6, Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed its rating of AAA (sf) on the Class A Notes (the Notes) issued by Signal Peak CLO 6, Ltd.

The rating on the Notes was issued pursuant to the Indenture, dated as of July 17, 2018, among Signal Peak CLO 6, Ltd. as Issuer; Signal Peak CLO 6, LLC as Co-Issuer; and U.S. Bank National Association (rated AA (high) with a Stable trend by DBRS Morningstar) as 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 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 ORIX Advisers LLC (ORIX), a wholly owned subsidiary of Mariner Investment Group, LLC, as Collateral Manager. DBRS Morningstar considers ORIX 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 July 28, 2031. The Reinvestment Period ends on July 28, 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 ORIX 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, as set forth in Schedule C of the Indenture. DBRS Morningstar converted the matrix into DBRS Morningstar equivalent terms using linear interpolation for metrics such as Diversity Score, Weighted Average Spread and Weighted Average Recovery Rate, and analyzed each structural configuration as a unique transaction. The Coverage Tests and Collateral Quality Tests that DBRS Morningstar modeled during its analysis are presented below:

Coverage Tests:
Class A/B OC Ratio: 125.32%
Class C OC Ratio: 113.95%
Class D OC Ratio: 108.42%
Class E OC Ratio: 103.93%
Class A/B IC Ratio: 115.00%
Class C IC Ratio: 105.00%
Class D IC Ratio: 102.00%
Class E IC Ratio: 101.00%

Collateral Quality Tests:
Weighted Average Life Test: 7/28/2027
Diversity Score: 85
Moody’s Maximum Rating Factor Test: 3350
Weighted Average Spread: 3.38%

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 70% 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 January 18, 2023, the Borrower is in compliance with all Coverage and Collateral Quality Tests, as well as the Concentration Limitation tests. There were around $0.97 million in defaulted obligations registered in the underlying portfolio. 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, which also 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: December 2022 Update,” published on December 21, 2022 (https://www.dbrsmorningstar.com/research/407678). 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, AND GOVERNANCE CONSIDERATIONS
There were no environmental, social, and 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 applicable to the rating are Rating CLOs and CDOs of Large Corporate Credit (February 7, 2023; https://www.dbrsmorningstar.com/research/409498) and Cash Flow Assumptions for Corporate Credit Securitizations (https://www.dbrsmorningstar.com/research/409499; February 7, 2023).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.com/about/methodologies.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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.

-- Operational Risk Assessment for Collateralized Loan Obligation (CLO) and Collateralized Debt Obligation (CDO) Managers of Large Corporate Credits (September 23, 2022), https://www.dbrsmorningstar.com/research/403042

-- Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022), https://www.dbrsmorningstar.com/research/402153

-- Legal Criteria for U.S. Structured Finance (December 7, 2022), https://www.dbrsmorningstar.com/research/407008

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

DBRS, Inc.
140 Broadway, 43rd Floor
New York, NY 10005 USA
Tel. +1 212 806-3277