DBRS Morningstar Assigns Ratings to the Term Loan and the Subordinated Loan of CBAM CLO Management LLC

DBRS, Inc. (DBRS Morningstar) assigned ratings of BBB (high) (sf) to the Term Loan and BBB (low) (sf) to the Subordinated Loan (together, the Loans) issued by CBAM CLO Management LLC, pursuant to the Loan and Security Agreement (LSA), dated as of June 29, 2017, as amended by Amendment No. 1 to the LSA (the Amendment), dated as of December 21, 2020 (the Amendment Date), among CBAM CLO Management LLC, as Borrower, Security Benefit Life Insurance Company, as Lender, and Cortland Capital Market Services LLC, as Agent.

The rating on the Term Loan addresses the ultimate payment of the Term Loan Interest Rate (excluding the Post-Default Rate) and Term Loan Deferred Interest and the ultimate payment of principal on or before the Maturity Date (all capitalized terms, as defined in the LSA).

The rating on the Subordinated Loan addresses the ultimate payment of the Subordinated Loan Interest Amounts (excluding the Post-Default Rate) and Subordinated Loan Deferred Interest and the ultimate payment of principal on or before the Maturity Date (all capitalized terms, as defined in the LSA).

RATING RATIONALE
The Borrower is a special-purpose vehicle that was formed to hold the Financed Retention Securities and be the Portfolio Manager of CBAM 2017-1, Ltd. (the CLO Issuer). The Term Loan and the Subordinated Loan of the Borrower will be collateralized by the Financed Retention Securities of the CLO Issuer. The Financed Retention Securities consist of (a) the principal amount of (i) $37,500,000 of the Class A-1 Notes, (ii) $4,375,000 of the Class A-2 Notes, (iii) $5,625,000 of the Class B Notes, (iv) $3,562,500 of the Class C Notes, and (v) $3,750,000 of the Class D Notes, as such terms are defined in the CLO Indenture, and (b) any CLO Notes received, or loans made to the CLO Issuer by the Borrower under a refinancing facility, in connection a Refinancing or a Re-Pricing of any Financed Retention Securities. The $500,000 Class X Notes were repaid in whole prior to the Amendment Date.

As of the Amendment Date, certain key parties to the transaction are Related Parties (as defined in the LSA). The collateral securing the Term Loan and the Subordinated Loan, the Financed Retention Securities of CBAM 2017-1, Ltd., consists of securities that were issued in connection with the collateralized loan obligation (CLO) transaction CBAM 2017-1, Ltd., where the sponsor of the transaction is CBAM Partners, LLC, now acquired by the Carlyle Group (Carlyle).

The transaction’s Stated Maturity is July 20, 2030. The Reinvestment Period ended on July 20, 2022. Given a static pool, DBRS Morningstar analyzed the actual obligations in the pool as opposed to a hypothetical pool, governed by the covenanted test limitations.

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 Loans to withstand projected collateral loss rates under various cash flow stress scenarios.
(4) The credit quality of the underlying collateral.
(5) DBRS Morningstar’s assessment of the origination, servicing, and CLO management capabilities of Carlyle as the
Collateral Manager.

Some particular strengths of the transaction are (1) collateral quality that consists of at least 90% senior-secured floating-rate broadly syndicated loans and (2) the strong diversification of underlying obligations. Some challenges were identified as follows: (1) a failing Maximum Weighted Average Life (WAL) Test; and (2) the underlying collateral portfolio may be insufficient to redeem the Loans in an Event of Default.

The transaction entered its amortization period on July 20, 2022. To account for the static pool, DBRS Morningstar analyzed the actual obligations in the pool as reported in the trustee report on May 15, 2023, which took into account the failing WAL Test. The Coverage Tests that DBRS Morningstar modeled in its analysis are presented below:

Coverage Tests:
Class A/B OC Ratio: 121.60%
Class C OC Ratio: 114.40%
Class D OC Ratio: 108.00%
Class E OC Ratio: 104.70%

Class A/B IC Ratio: 120.00%
Class C IC Ratio: 115.00%
Class D IC Ratio: 110.00%

Collateral Quality Tests:
Maximum Weighted Average Life Test: 3.44 years
Minimum Floating Spread Test: 3.44%
Minimum Fixed Coupon Test: 0.00%

DBRS Morningstar modeled the transaction using the DBRS CLO Asset Model and its proprietary cash flow engine, which incorporated assumptions regarding principal amortization, amount of interest generated, default timings, and recovery rates, among other credit considerations referenced in the DBRS Morningstar rating methodology “Cash Flow Assumptions for Corporate Credit Securitizations.” Model-based analysis produced satisfactory results that supported the assignment of the ratings on the Loans.

Considering the transaction structure, its legal aspects, and the results produced by the models, DBRS Morningstar assigned the ratings above on the Loans.

To assess portfolio credit quality, DBRS Morningstar provides a credit estimate or internal assessment for each nonfinancial corporate obligor in the portfolio not rated by DBRS Morningstar. Credit estimates are not ratings; rather, they represent a model-driven default probability for each obligor that DBRS Morningstar uses when rating the Loans.

The transaction assumptions consider DBRS Morningstar’s baseline macroeconomic scenarios for rated sovereign economies, available in its commentary “Baseline Macroeconomic Scenarios for Rated Sovereigns: April 2023 Update” (https://www.dbrsmorningstar.com/research/413218), published on April 28, 2023. 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, please see its May 18, 2020, commentary, “CLO Risk Exposure to the Coronavirus Disease (COVID-19)”: https://www.dbrsmorningstar.com/research/361112.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 (May 17, 2022).

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

The principal methodologies applicable to the ratings are Rating CLOs and CDOs of Large Corporate Credit and DBRS Morningstar CLO Asset Model Version 2.3.1 (February 7, 2023; www.dbrsmorningstar.com/research/409498) and Cash Flow Assumptions for Corporate Credit Securitizations (February 7, 2023; www.dbrsmorningstar.com/research/409499).

Other methodologies referenced in this transaction are listed at the end of this press release.

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.

The rating was initiated at the request of the rated entity.

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

This is a solicited credit rating.

DBRS, Inc.
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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 DBRS Morningstar CLO Asset Model Version 2.3.1 (February 7, 2023)
www.dbrsmorningstar.com/research/409498

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

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

-- 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

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