DBRS Morningstar Confirms Credit Ratings, Removes Under Review with Developing Implications Status from Class A-1 Notes Issued by Ares XLVI CLO Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed the credit rating on the Class A-1 Notes (the Notes) issued by Ares XLVI CLO Ltd. (the Issuer).

At the same time, DBRS Morningstar removed the credit rating on the Notes from Under Review with Developing Implications where it was placed on July 27, 2023.

The Notes were issued pursuant to the Indenture dated as of January 12, 2018, among Ares XLVI CLO Ltd. as Issuer and U.S. Bank National Association (rated AA (high) with a Negative trend by DBRS Morningstar) as Trustee. 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 Ares CLO Management LLC (Ares), an affiliate of Ares Management Corporation, as Asset Manager. DBRS Morningstar considers Ares to be an acceptable CLO manager.

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.

RATING RATIONALE
The credit rating action on the Notes is the result of DBRS Morningstar’s review of the transaction pursuant to the benchmark replacement event that occurred as of July 3, 2023 (pursuant to the Indenture) and DBRS Morningstar’s application of its “Global Methodology for Rating CLOs and Corporate CDOs,” including the DBRS Morningstar CLO Insight Model, released on October 22, 2023. On July 27, 2023, DBRS Morningstar placed its credit rating on the Notes Under Review with Developing Implications to analyze the transaction pursuant to the benchmark replacement event, which transitioned the transaction’s benchmark to the Secured Overnight Financing Rate from Libor. The Stated Maturity is January 15, 2030. The Reinvestment Period ended on January 15, 2023.

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 portfolio criteria, which include the collateral quality tests, coverage tests, and eligibility criteria, also known as concentration limitations.
(5) DBRS Morningstar’s assessment of the origination, servicing, and CLO management capabilities of Ares 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 6, 2023. The coverage and collateral quality test actual reported values and thresholds, respectively, that DBRS Morningstar used in its analysis are as follows:

Coverage Tests:
-- Senior Overcollateralization (OC) Ratio: actual 135.18%; threshold 124.20%
-- Class C OC Ratio: actual 122.61%; threshold 115.50%
-- Class D OC Ratio: actual 112.30%; threshold 108.40%
-- Class E OC Ratio: actual 105.29%; threshold 103.75%
-- Senior Interest Coverage (IC) Ratio: actual 174.94%; threshold 120.00%
-- Class C IC Ratio: actual 157.19%; threshold 115.00%
-- Class D IC Ratio: actual 141.65%; threshold 110.00%
-- Class E IC Ratio: actual 128.01%; threshold 105.00%

Collateral Quality Tests:
-- Diversity Test: actual 75; threshold 80 (minimum)
-- Weighted-Average (WA) Spread Test: actual 3.64% threshold 3.48% (minimum)
-- WA Rating Test: actual 3003; threshold 3003 (maximum)
-- WA Moody’s Recovery Rate Test: actual 46.83%; threshold 43.00% (minimum)
-- WA S&P Recovery Rate Test: actual 37.18%; threshold 36.00% (minimum)
-- WA Life Test: actual 3.83 years; threshold 3.25 years (maximum)
-- WA Coupon Test: no fixed assets; threshold 6.50% (minimum)

Some particular strengths of the transaction are: (1) collateral quality that consists of at least 95.1% senior-secured broadly syndicated loans and (2) the adequacy of cash collected from the collateral to pay interest. Some challenges of the transaction are: (1) up to 92.5% of the portfolio pool may consist of Cov-Lite Loans and (2) the underlying collateral portfolio may be insufficient to redeem the Notes in an event of default.

The transaction is performing according to the contractual requirements of the Indenture. As of November 6, 2023, the Issuer is in compliance with all coverage tests, and most collateral quality tests and concentration limitations. There were around $7.4 million in defaulted obligations registered in the underlying portfolio accounting for approximately 1.5% of the portfolio par amount.

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.
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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, 2023), https://www.dbrsmorningstar.com/research/425081

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