DBRS Morningstar Confirms Credit Rating, Removes Under Review with Developing Implications Status on the Class A Notes Issued by Signal Peak CLO 6, Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed its credit rating of AAA (sf) on the Class A Notes (the Notes) issued by Signal Peak CLO 6, Ltd. At the same time, DBRS Morningstar removed the credit rating from Under Review with Developing Implications, where it had been placed on August 15, 2023. The Notes were issued pursuant to the Indenture, dated as of July 17, 2018, as amended by the Second Supplemental Indenture, dated as of June 16, 2023 (the Amendment) among Signal Peak CLO 6, Ltd. as Issuer; Signal Peak CLO 6, LLC as Co-Issuer; and U.S. Bank National Association (rated AA (high) with a Negative trend by DBRS Morningstar) as Trustee.

The credit 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 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 ORIX Advisers LLC (ORIX), a wholly owned subsidiary of Mariner Investment Group, LLC, as Collateral Manager. DBRS Morningstar considers ORIX to be an acceptable CLO manager.

CREDIT RATING RATIONALE
The rating action on the Notes is the result of DBRS Morningstar’s review of the Amendment and the application by DBRS Morningstar of the “Global Methodology for Rating CLOs and Corporate CDOs,” including the DBRS Morningstar CLO Insight Model, released on October 22, 2023. On August 15, 2023, DBRS Morningstar placed its credit rating on the Notes Under Review with Developing Implications to analyze the transaction pursuant to the Amendment, which transitioned the transaction’s benchmark from Libor to the Secured Overnight Financing Rate (SOFR).

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 and the ability of the transaction to reinvest Principal Proceeds into new Collateral Obligations, subject to the Eligibility Criteria, which include testing the Concentration Limitations, Collateral Quality Tests, and Coverage Tests.
(5) DBRS Morningstar’s assessment of the origination, servicing, and CLO management capabilities of ORIX as the Collateral Manager.

This portfolio is static in nature and allows limited reinvestment. To account for a static pool, DBRS Morningstar analyzed the actual obligations in the pool as reported in the trustee report as of November 15, 2023. The coverage and collateral quality test reported values and thresholds, respectively, that DBRS Morningstar used in its analysis are as follows:

Coverage Tests:
Class A/B Overcollateralization (OC) Ratio: actual 132.66%; threshold 125.32%
Class C OC Ratio: actual 118.92%; threshold 113.95%
Class D OC Ratio: actual 111.24%; threshold 108.42%
Class E OC Ratio: actual 105.68%; threshold 103.93%
Class A/B IC Ratio: actual 166.25%; threshold 115.00%
Class C IC Ratio: actual 147.36%; threshold 105.00%
Class D IC Ratio: actual 135.73%; threshold 102.00%
Class E IC Ratio: actual 124.85%; threshold 101.00%

Collateral Quality Tests:
Weighted Average Life Test: actual 8/21/2027; threshold 7/28/2027 (maximum)
Moody’s Maximum Rating Factor Test: actual 2757; threshold 3350 (maximum)
Class A S&P Weighted Average Recovery Rate Test: actual 43.78%; threshold 41.70% (minimum)
Class B S&P Weighted Average Recovery Rate Test: actual 53.53%; threshold 51.75% (minimum)
Class C S&P Weighted Average Recovery Rate Test: actual 59.16%; threshold 57.15% (minimum)
Class D S&P Weighted Average Recovery Rate Test: actual 65.44%; threshold 63.49% (minimum)
Class E S&P Weighted Average Recovery Rate Test: actual 70.56%; threshold 68.50% (minimum)

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) more than 50% of the portfolio pool consists of Cov-lite Loans; and (2) the underlying collateral portfolio may be insufficient to redeem the Notes in an Event of Default.

As of November 15, 2023, the Borrower is in compliance with all Coverage and Concentration Limitations, as well as most Collateral Quality Tests. The Borrower is not in compliance with the Weighted Average Life Test as of November 15, 2023, which was accounted for in DBRS Morningstar’s analysis of the transaction. There were around $4.74 million in defaulted obligations registered in the underlying portfolio as of the November 15, 2023 trustee report date.

DBRS Morningstar analyzed the transaction using the DBRS Morningstar CLO Insight Model and its proprietary cash flow engine, which incorporated assumptions regarding principal amortization, amount of interest generated, principal prepayments, default timings, and recovery rates, among other credit considerations referenced in the DBRS Morningstar “Global Methodology for Rating CLOs and Corporate CDOs” (October 22, 2023; https://www.dbrsmorningstar.com/research/422269). DBRS Morningstar analyzed each loan in the pool separately by inputting its tenor, country of origin, and industry into the CLO Insight Model. Model-based analysis produced satisfactory results, which supported the confirmation of the credit rating on the Notes.

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.

For more information regarding DBRS Morningstar’s additional adjustment for select industries related to the Coronavirus Disease (COVID-19) pandemic, 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/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 the Global Methodology for Rating CLOs and Corporate CDOs and the DBRS Morningstar CLO Insight Model (v.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.
140 Broadway, 43rd Floor
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.

-- 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].