DBRS Morningstar Confirms Credit Rating on the Class A Notes Issued by CBAM 2018-5, Ltd., Removes From Under Review With Developing Implications

DBRS, Inc. (DBRS Morningstar) confirmed its credit rating of AAA (sf) on the Class A Notes (the Notes) issued by CBAM 2018-5, Ltd. and CBAM 2018-5, LLC (together, the Co-Issuers), and removed the Under Review with Developing Implications status.

The Notes were issued pursuant to the Indenture, dated as of March 29, 2018, as amended by the Second Supplemental Indenture, dated as of June 30, 2023 (the Amendment), between the Co-Issuers and U.S. Bank National Association (rated AA (high) with a Negative trend by DBRS Morningstar) as the 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 issued by the Co-Issuers 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 The Carlyle Group (Carlyle), which acquired the preceding Collateral Manager, CBAM CLO Management, LLC (CBAM). DBRS Morningstar considers Carlyle to be an acceptable CLO manager.

RATING RATIONALE
The rating action is a result of the execution of the Second Supplemental Indenture, dated as of June 30, 2023, and the application by DBRS Morningstar of its “Global Methodology for Rating CLOs and Corporate CDOs,” including the DBRS CLO Insight Model, released on October 22, 2023. The Amendment transitions the transaction’s benchmark rate to the Reference Rate, as defined in the Indenture. The Stated Maturity is April 17, 2031. The Reinvestment Period ended on April 17, 2023. The rating confirmation is a result of the Class A Notes performing within DBRS Morningstar’s expectation. DBRS Morningstar applied the Current Profile analysis, which is based on the actual pool assets. Given the static pool, DBRS Morningstar analyzed the actual obligations in the pool, as opposed to a hypothetical pool, governed by the covenanted test limitations. The Current Profile analysis produced satisfactory results that warranted the above-mentioned rating confirmation.

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.
(5) DBRS Morningstar’s assessment of the origination, servicing, and CLO management capabilities of Carlyle as the Collateral Manager.

The transaction entered the amortization period on April 17, 2023, which assumes limited reinvestment abilities that are subject to the Post-Reinvestment Period Criteria. To account for the primarily static pool, DBRS Morningstar analyzed the actual obligations in the pool as reported in the trustee report as of October 3, 2023. The Coverage Tests and Collateral Quality (CQ) Tests that DBRS Morningstar modeled in its analysis are presented below:

(1) Minimum Floating Spread Test: 3.53%
(2) Minimum Weighted-Average Moody’s Recovery Rate Test: 47.30%
(3) Maximum Coupon Test: 7.00%
(4) Moody’s Diversity Test: 85
(5) Maximum Moody’s Rating Factor Test: 2934
(6) Weighted-Average Life (WAL) Test: 3.5

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) the weighted-average credit quality of the underlying obligors may fall below investment grade; (2) the underlying collateral portfolio may be insufficient to redeem the Notes in an Event of Default.

As of October 3, 2023, the transaction is failing one CQ test, the WAL test, and one concentration limitation test for the CCC Obligor limit. The failures of this nature are accounted for in the credit rating analysis. DBRS Morningstar analyzed each loan in the pool separately by inputting its tenor, DBRS Morningstar rating, country of origin, and industry into the DBRS CLO Insight Model. The model-based analysis along with the cash flow engine output produced satisfactory results, which supported the rating confirmation on the Notes.

DBRS Morningstar modeled the transaction using the DBRS CLO Insight Model and its proprietary cash flow engine, which incorporated assumptions regarding principal amortization, principal pre-payments, amount of interest generated, default timings, and recovery rates, among other credit considerations referenced in the DBRS Morningstar rating methodology “Global Methodology for Rating CLOs and Corporate CDOs” (October 22, 2023; https://www.dbrsmorningstar.com/research/422269).

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 (MCR). In addition, MCR 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.

For more information regarding DBRS Morningstar’s additional adjustment for select industries related to the pandemic, 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,” published on September 28, 2023 (https://www.dbrsmorningstar.com/research/421227). These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse pandemic scenarios, which were first published in April 2020.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/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/416784 (July 4, 2023).

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

The principal methodology applicable to the credit rating is Global Methodology for Rating CLOs and Corporate CDOs and the DBRS Morningstar CLO Insight Model 1.0.0.0 (October 22, 2023; https://www.dbrsmorningstar.com/research/422269).

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 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.

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

-- 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].