DBRS Morningstar Upgrades and Confirms Ratings on Certain Notes and Tranche Amounts of Manitoulin USD Ltd., Muskoka 2019-1

DBRS, Inc. (DBRS Morningstar) confirmed its provisional rating on the Tranche A Amount at AAA (sf) and upgraded its provisional ratings on the Tranche B Amount to AA (low) (sf) from A (high) (sf) and the Tranche C Amount to A (high) (sf) from BBB (high) (sf) (collectively, with the Tranche A Amount, the Tranche Amounts) of two unexecuted, unfunded financial guarantees (the Financial Guarantees) of Manitoulin USD Ltd., Muskoka 2019-1 (the Issuer) with respect to a portfolio of primarily U.S. and Canadian senior secured and senior unsecured loans originated or managed by the Bank of Montreal (BMO; rated AA with a Stable trend by DBRS Morningstar).

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).

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

DBRS Morningstar has also upgraded its ratings on the Muskoka Series 2019-1 Class B Guarantee Linked Notes (the Class B Notes) to AA (low) (sf) from A (high) (sf), the Muskoka Series 2019-1 Class C Guarantee Linked Notes (the Class C Notes) to A (high) (sf) from BBB (high) (sf), and the Muskoka Series 2019-1 Class D Guarantee Linked Notes (the Class D Notes) to BBB (high) (sf) from BB (high) (sf) (together with the Class B Notes and Class C Notes, the Notes). Manitoulin USD Limited (Manitoulin) issued the Notes referencing the executed Junior Loan Portfolio Financial Guarantee (the Junior Financial Guarantee) dated as of January 30, 2019, between Manitoulin as the Guarantor and BMO as the 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).

RATING RATIONALE
The rating actions are a result of the annual surveillance review of the transaction. The Replenishment Cut-Off Date was June 10, 2022. The Scheduled Termination Date is December 10, 2025. DBRS Morningstar upgraded ratings on certain Tranche Amounts and Notes because the transaction has entered the post-replenishment phase, which resulted in (1) a $80.01 million note paydown which deleveraged the structure and (2) a lower expected loss given greater certainty around underlying portfolio.

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.
(3) The ability of the Tranche Amounts and the Notes to withstand projected collateral loss rates under various cash flow stress scenarios.
(4) The credit quality of the underlying collateral, subject to the Eligibility Criteria.
(5) DBRS Morningstar’s assessment of the origination, servicing, and management capabilities of BMO.
(6) The legal structure as well as legal opinions addressing certain matters of the Borrower and the consistency with the DBRS Morningstar “Legal Criteria for U.S. Structured Finance” methodology.

The transaction is performing according to the parameters set in the Financial Guarantees. As of December 30, 2022, the Borrower is in compliance with all Replenishment Criteria.

DBRS Morningstar modeled the transaction using the DBRS Morningstar CLO Asset model, which incorporated the current portfolio of the transaction and tranche-specific recovery rates, among other credit considerations referenced in the DBRS Morningstar rating methodology “Rating CLOs and CDOs of Large Corporate Credit.”

The current ratings on the Tranche B and Tranche C Amounts, as well as the Class B Notes and the Class C Notes, differ from the ratings implied by the quantitative model, which would have been higher than the upgraded ratings. DBRS Morningstar considers these differences to be a material deviation from the model. The highest achievable ratings for the above-mentioned rated securities are capped at AA (low) (sf) because of the exposure to the counterparty risk in the form of Cash Deposit Accounts. The transaction depends on the ability and willingness of BMO as the Cash Deposit Bank to pay the Guaranteed Fee Amounts.

On the Effective Date (as defined in the Financial Guarantees referenced above), the Issuer will use the proceeds from the issuance of the Notes to make a deposit into the Cash Deposit Accounts with the Cash Deposit Bank. DBRS Morningstar may review the ratings on the Notes in the event of a downgrade of the Cash Deposit Bank below certain thresholds, as defined in the transaction documents.

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 Mapping Financial Institution Internal Ratings to DBRS Morningstar Ratings for Global Structured Credit Transactions (February 24, 2022; https://www.dbrsmorningstar.com/research/392873).

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.

DBRS Morningstar materially deviated from its predictive model (CLO Asset Model Version 2.2.3.1) when determining the ratings assigned to the Tranche B Amount, Tranche C Amount, Class B Notes, and Class C Notes by a three or more notch differential. The material deviations are warranted given the counterparty risk of BMO as the Cash Deposit Bank.

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.

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 United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. 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 Morningstar applied the senior secured and senior unsecured recovery rates defined in its “Rating CLOs and CDOs of Large Corporate Credit” methodology (February 7, 2023). DBRS Morningstar applies different recovery rates depending on the recovery tier and seniority.

DBRS Morningstar 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 Morningstar relied on either public ratings or a ratings mapping to DBRS Morningstar ratings of BMO’s internal ratings models. The mapping was completed in accordance with DBRS Morningstar’s “Mapping Financial Institution Internal Ratings to DBRS Morningstar Ratings for Global Structured Credit Transactions” methodology (February 24, 2022).

The last rating action on this transaction took place on February 9, 2022.

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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

Lead Analyst: Sharon Shen, Senior Analyst, U.S. Structured Credit
Ratings Analyst: Joseph Priolo, Senior Vice President, U.S. Structured Credit
Rating Committee Chair: Jerry van Koolbergen, Managing Director, U.S. Structured Credit
Initial Rating Date: January 24, 2019

DBRS, Inc.
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Tel. +1 212 806-3277

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Rating CLOs and CDOs of Large Corporate Credit and CLO Asset Model Version 2.2.3.1 (February 7, 2023), https://www.dbrsmorningstar.com/research/409498

-- Cash Flow Assumptions for Corporate Credit Securitizations (February 7, 2023), https://www.dbrsmorningstar.com/research/409499

-- 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

-- Mapping Financial Institution Internal Ratings to DBRS Morningstar Ratings for Global Structured Credit Transactions (February 24, 2022), https://www.dbrsmorningstar.com/research/392873

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