DBRS Morningstar Requests Comments on the Proposed Global Methodology for Rating CLOs and Corporate CDOs and DBRS Morningstar CLO Insight Model

DBRS Morningstar is requesting comments on the proposed Global Methodology for Rating CLOs and Corporate CDOs (the RFC CLO Methodology) and DBRS Morningstar CLO Insight Model (CLO Insight Model), collectively, the “RFC CLO Methodology, including the CLO Insight Model.”

The RFC CLO Methodology, including the CLO Insight Model may, upon finalization, supersede two existing methodologies: “Rating CLOs and CDOs of Large Corporate Credit” and “Cash Flow Assumptions for Corporate Credit Securitizations (both published on February 7, 2023), and the related public predictive model “DBRS Morningstar CLO Asset Model”(collectively, the “Existing CLO Methodologies, including the CLO Asset Model”).

Upon finalization, the RFC CLO Methodology, including the CLO Insight Model, may be the principal CLO asset class methodology (and the predictive model) that DBRS Morningstar intends to apply to assign new credit ratings and monitor outstanding credit ratings in the collateralized loan obligation (CLO) asset class globally.

The reason for the proposed material changes is to update certain assumptions (listed below) based upon updated datasets and expand our analytical approaches to address broadly syndicated loan (BSL) CLOs.

The proposed updates include:
(1) The introduction of two new primary analytical approaches: the Current Profile Approach and Trading Scenarios Approach. Each analytical approach represents collateral compositions and other assumptions used in the application of the methodology. The Trading Scenarios Approach is further subdivided into active management stresses related to (A) BSL and Market-Sourced CLOs and (B) Middle Market and Private Credit CLOs. Trading Scenarios for BSL and Market-Sourced CLOs introduce scenarios to analyze the risk/return profile of actively managed leveraged loan portfolios in structures such as BSL CLOs.
(2) Updates to the calculation of default probabilities for publicly rated borrowers.
(3) Updates to recovery rate assumptions, including additional stresses for covenant-lite loans
(4) Updates to country tiering
(5) Updates to industry classifications.
(6) Introduction of credit dispersion assumptions into stressed pools that are evaluated in a model.
(7) Updates to amortization and prepayment rate assumptions
(8) Updates to surveillance for existing credit ratings, including performing a Current Profile analysis.
(9) Consolidation of two existing DBRS Morningstar methodologies (“Rating CLOs and DCOs of Large Corporate Credit” and “Cash Flow Assumptions for Corporate Credit Securitizations”) into a newly formatted methodology (the RFC CLO Methodology).

DBRS Morningstar also proposes to update the CLO Asset Model and rename it the “DBRS Morningstar CLO Insight Model.”

Other proposed updates to the model include:
-- An update of the core model code to a new programming language, Python.
-- Implementation of amortization and prepayment rate assumptions.

The DBRS Morningstar CLO Insight Model produces stressed default rate assumptions used in a cash flow engine that tests the ability of specific tranches or notes to withstand each credit rating-level stress assumption, similar to the DBRS Morningstar CLO Asset Model. DBRS Morningstar uses a Monte Carlo simulation to determine a ratings-based lifetime pool default rate (the Stressed Default Rate) that can be equated with a certain credit rating. The proposed changes also include user workflow improvements as well as changes to the model deployment infrastructure.

Additional DBRS Morningstar credit rating methodologies reference the Existing CLO Methodologies, including the CLO Asset Model, as applicable. As a result of the proposed RFC CLO Methodology, including the CLO Insight Model, certain DBRS Morningstar credit ratings in asset classes other than CLOs could also be affected. The potentially affected additional asset classes (other than CLOs) include those that securitize U.S., European, and Canadian corporate assets; investment fund debt; and European asset-backed securities (ABS). Other asset classes that reference the Existing CLO Methodologies, including the CLO Asset Model, as applicable, are not affected, including U.S. ABS asset classes.

DBRS Morningstar deems the proposed updates to be material.

As a result of the proposed material changes, DBRS Morningstar expects a limited impact on outstanding public and private credit ratings under the four related methodologies listed below. Most of the impacted outstanding credit ratings under these methodologies are expected to be confirmed, with a limited number of expected upgrades or downgrades with a magnitude of one to two notches.

(1) Under the “Rating CLOs and CDOs of Large Corporate Credit” methodology, 339 out of 339 public credit ratings in 89 CLO transactions are expected to be affected.

(2) Under the “Global Methodology for Rating Debt Issued by Investment Fund,” four out of four public credit ratings in one public investment fund debt transaction are expected to be affected.

(3) Under the “Rating CLOs Backed by Loans to European SMEs” methodology, 49 out of 49 outstanding public credit ratings in 31 public SME CLO transactions are expected to be affected.

(4) Under the “Rating European Consumer and Commercial Asset-Backed Securitisations” methodology, nine out of 91 outstanding public credit ratings in six public auto lease transactions are expected to be affected as wells as 18 out of 28 public credit ratings in nine commercial lease transactions and 10 out of 10 public credit ratings in four public insurance premium finance transactions.

DBRS Morningstar expects no impact on outstanding credit ratings under the related methodologies listed below (which reference the Existing CLO Methodologies, including the CLO Asset Model, and will continue to reference the RFC CLO Methodology, including the CLO Insight Model, as applicable):

-- Rating U.S. Rental Car Securitizations
-- Rating U.S. Equipment Lease and Loan Securitizations
-- Rating Structured Finance CDO Restructurings
-- Rating Structured Aircraft Transactions
-- Rating U.S. Structured Settlements Asset-Backed Securitizations
-- Rating U.S. Structured Finance Transactions
-- Rating U.S. Structured Finance Transactions—Appendix I: U.S. Consumer Loan ABS Transactions
-- Rating U.S. Structured Finance Transactions—Appendix II: U.S. Health-Care Receivables ABS
-- Rating U.S. Structured Finance Transactions—Appendix V: Obligations Backed by Insurance Policy (Financial Guarantee)
-- Rating U.S. Structured Finance Transactions—Appendix VII: Insurance Commission ABS
-- Rating U.S. Structured Finance Transactions—Appendix XI: U.S. Consumer Litigation Finance
-- Rating U.S. Structured Finance Transactions—Appendix XII: U.S. Paired Policies
-- Rating U.S. Structured Finance Transactions—Appendix XIII: U.S. Agricultural Production Lending
-- Rating U.S. Structured Finance Transactions—Appendix XIV: U.S. Venture Debt
-- Rating U.S. Structured Finance Transactions—Appendix XVI: Obligations Backed by Market-Value Collateral
-- Rating Canadian Equipment Finance Securitization Transactions
-- General Corporate Methodology—Appendix 3—Canadian Government Pooled Lending Vehicles
-- DBRS Morningstar Master U.S. ABS Surveillance

In addition, DBRS Morningstar expects no impact on outstanding credit ratings under the “Global Methodology for Rating and Monitoring Covered Bonds” (which references the “Rating CLOs Backed by Loans to European SMEs, which currently references the Existing CLO Methodologies and will continue to reference the RFC CLO methodology).

Comments should be received on or before October 21, 2023. Please submit your comments to the following email address: sfcomments@dbrsmorningstar.com.

DBRS Morningstar publishes on its website all comments received, except in cases where confidentiality is requested by the respondent.

Notes:
DBRS Morningstar methodologies are publicly available on its website www.dbrsmorningstar.com under Methodologies & Criteria.

For more information on this methodology or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.