DBRS Morningstar Upgrades and Confirms Ratings on Certain Guarantee Linked Notes and Tranche Amounts of Manitoulin USD Ltd., Muskoka 2022-1

DBRS, Inc. (DBRS Morningstar) upgraded and confirmed the ratings on the Muskoka Series 2022-1 Class B Guarantee Linked Notes (the Class B Notes), the Muskoka Series 2022-1 Class C Guarantee Linked Notes (the Class C Notes), and the Muskoka Series 2022-1 Class D Guarantee Linked Notes (the Class D Notes; together, with the Class B Notes and the Class C Notes, the Notes) issued by Manitoulin USD Ltd. (the Issuer) referencing the executed Junior Loan Portfolio Financial Guarantees (the Financial Guarantee), dated as of October 19, 2022, between the Issuer as Guarantor and the Bank of Montreal (BMO; rated AA with a Stable trend by DBRS Morningstar) as Beneficiary with respect to a portfolio of U.S. and Canadian senior secured and senior unsecured loans originated or managed by BMO, as follows:

-- Class B Notes confirmed at AA (sf)
-- Class C Notes upgraded to A (high) (sf) from A (sf)
-- Class D Notes upgraded to BBB (sf) from BBB (low) (sf)

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 Financial Guarantee). The payment of the interest due on the Notes is subject to the Beneficiary’s ability to pay the Guarantee Fee Amount (as defined in the Financial Guarantee).

DBRS Morningstar also upgraded and confirmed the provisional ratings on the Tranche A Amount, Tranche B Amount, Tranche C Amount, and Tranche D Amount (collectively, the Tranche Amounts) of two unexecuted, unfunded financial guarantees (the Unfunded Financial Guarantees) of Manitoulin USD Ltd., Muskoka 2022-1 with respect to a portfolio of primarily U.S. and Canadian senior secured and senior unsecured loans originated or managed by BMO, as follows:

-- Tranche A Amount confirmed at AAA (sf)
-- Tranche B Amount confirmed at AA (sf)
-- Tranche C Amount upgraded to A (high) (sf) from A (sf)
-- Tranche D Amount upgraded to BBB (sf) from BBB (low) (sf)

The provisional ratings on the Tranche Amounts address the likelihood of a reduction to the respective tranche notional amounts resulting from obligor defaults within the guaranteed portfolio during the period from the Effective Date until the Scheduled Termination Date. For obligors within the guaranteed portfolio, default events are limited to payment default, insolvency, and restructuring events.

The credit ratings take into consideration the creditworthiness of the reference portfolio only. The credit ratings do not address counterparty risk nor the likelihood of any event of default or termination events under the agreement occurring. BMO bought protection under a similar executed financial guarantee for certain issued notes but has not executed contracts related to the tranche notional amounts.

DBRS Morningstar’s credit ratings on the Tranche Amounts are expected to remain provisional until the underlying agreements are executed. BMO may have no intention of executing the Unfunded 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.

To assess portfolio credit quality, DBRS Morningstar may provide a credit estimate, internal assessment, or ratings mapping of BMO’s internal ratings model. Credit estimates, internal assessments, and ratings mappings are not ratings; rather, they represent an abbreviated analysis, including model-driven or statistical components of default probability for each obligor that is used in assigning a rating to a facility sufficient to assess portfolio credit quality.

RATING RATIONALE
The credit rating actions are a result of the annual surveillance review of the transaction. DBRS Morningstar upgraded and confirmed the credit ratings on the Notes and the Tranche Amounts as the current and expected transaction performance has improved compared with DBRS Morningstar’s expectations at closing. The Scheduled Termination Date is November 10, 2027. The Replenishment Cut-Off Date is May 10, 2025.

On the Effective Date (as defined in the Financial Guarantees), the Issuer used 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 credit ratings on the Notes in the event of a downgrade of the Cash Deposit Bank below certain thresholds, as defined in the transaction documents.

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 stress scenarios.
(4) The credit quality of the underlying collateral, subject to the Replenishment 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 Issuer 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 August 29, 2023, the Issuer was in compliance with all Replenishment and Eligibility Criteria.

DBRS Morningstar modeled the transaction using the DBRS CLO Asset model, which incorporated certain reference portfolio characteristics including the Replenishment and Eligibility Criteria as defined per the Financial Guarantee; and tranche-specific recovery rates, among other credit considerations referenced in the DBRS Morningstar rating methodology “Rating CLOs and CDOs of Large Corporate Credit” (October 6, 2023; https://www.dbrsmorningstar.com/research/421604). Modeling produced improved results compared with closing, which warranted upgrades and confirmations on certain Tranche Amounts and the Notes.

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.

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 2023 Update” (https://www.dbrsmorningstar.com/research/421227), published on September 28, 2023. These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse coronavirus pandemic scenarios, which were first published in April 2020.

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/416784 (July 4, 2023).

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

The principal methodologies applicable to the credit rating are Rating CLOs and CDOs of Large Corporate Credit and CLO Asset Model Version 2.2.3.1 (October 6, 2023; https://www.dbrsmorningstar.com/research/421604) and Mapping Financial Institution Internal Ratings to DBRS Morningstar Ratings for Global Structured Credit Transactions (February 17, 2023; https://www.dbrsmorningstar.com/research/410076).

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 credit ratings assigned to the Class C Notes and the Tranche C Amount materially deviate from the credit ratings implied by the predictive model. DBRS Morningstar typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider a three-notch or more deviation from the credit rating stress implied by the predictive model to be a significant factor in evaluating the credit ratings. The rationale for the material deviations is that the predictive model results do not fully capture the risk of the above-mentioned rated instruments due to the exposure to the counterparty risk of BMO, such as the ability to pay the Guarantee Fee Amount and principal on the Notes. This warranted additional analysis, which led to the above rating actions.

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

The rated entity or its related entities did participate in the credit rating process for this credit 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 credit rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

This credit 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 credit ratings:

Each of the principal asset class methodologies employed in the analysis addressed one or more particular risks or aspects of the credit rating and were factored into the credit 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” (October 6, 2023) methodology. 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” (February 17, 2023) methodology.

This is the first credit rating action on the Tranche Amounts since the Initial Rating Date on October 13, 2022. This is the first credit rating action on the Notes since the finalization of ratings on October 19, 2022.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Oxana Rhybak, Vice President, U.S. Structured Credit
Rating Committee Chair: Jerry van Koolbergen, Managing Director, U.S. Structured Credit
Initial Rating Date: October 13, 2022

DBRS, Inc.
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New York, NY 10005 USA
Tel. +1 212 806-3277

The credit 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 (October 6, 2023), https://www.dbrsmorningstar.com/research/421604

-- Mapping Financial Institution Internal Ratings to DBRS Morningstar Ratings for Global Structured Credit Transactions (February 17, 2023), https://www.dbrsmorningstar.com/research/410076

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

-- Operational Risk Assessment for Collateralized Loan Obligations (CLOs) and Corporate Collateralized Debt Obligations (CDOs) (September 14, 2023), https://www.dbrsmorningstar.com/research/420608

-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023), https://www.dbrsmorningstar.com/research/415687

-- 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].