Morningstar DBRS Removes the Under Review with Developing Implications Status, Confirms, and Upgrades Credit Ratings on Certain Notes and Tranche Amounts of Manitoulin USD Ltd., Algonquin 2022-2

DBRS, Inc. (Morningstar DBRS) removed the Under Review with Developing Implications status and took the following credit rating actions on the Manitoulin USD Ltd., Algonquin 2022-2 Class B Guarantee Linked Notes (the Class B Notes), the Class C Guarantee Linked Notes (the Class C Notes), and the Class D Guarantee Linked Notes (the Class D Notes; together, with the Class B Notes and the Class C Notes, the Notes):

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

The Notes were issued by Manitoulin USD Ltd. (the Issuer) referencing the executed Junior Loan Portfolio Financial Guarantees (the Financial Guarantee), dated as of April 28, 2022, between the Issuer as Guarantor and the Bank of Montreal (BMO; rated AA with a Stable trend by Morningstar DBRS) as Beneficiary with respect to a portfolio of primarily U.S. and Canadian senior secured and senior unsecured loans originated or managed by BMO.

The credit 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).

Morningstar DBRS also removed the Under Review with Developing Implications status and took the following provisional credit rating actions 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., Algonquin 2022-2, with respect to a portfolio of primarily U.S. and Canadian senior secured and senior unsecured loans originated or managed by BMO:

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

The provisional credit 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 on the Tranche Amounts 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.

Morningstar DBRS expects the credit ratings to remain provisional until the underlying agreements are executed. BMO may have no intention of executing the Unfunded Financial Guarantees. Morningstar DBRS will maintain and monitor the provisional credit ratings throughout the life of the transaction or while it continues to receive performance information.

To assess portfolio credit quality, Morningstar DBRS 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.

CREDIT RATING RATIONALE/DESCRIPTION
The credit rating actions are a result of Morningstar DBRS’ review of the transaction performance and application of the “Global Methodology for Rating CLOs and Corporate CDOs” (the CLO Methodology), including the Morningstar DBRS CLO Insight Model, released on October 22, 2023. On November 9, 2023, the credit ratings were placed Under Review with Developing Implications to allow Morningstar DBRS to review the credit ratings using the CLO Methodology. The Scheduled Termination Date is November 1, 2027. The Replenishment Cut-Off Date is May 20, 2025.

On the Effective Date (as defined in the Financial Guarantees referenced above), 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. Morningstar DBRS 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, Morningstar DBRS considered the following aspects of the transaction:

(1) The Financial Guarantees of Manitoulin USD Ltd., a corporation established under the Canada Business Corporations Act. Manitoulin USD Ltd. is a synthetic risk transfer transaction with BMO as the Beneficiary.
(2) The integrity of the transaction structure and the form and sufficiency of available credit enhancement.
(3) The credit quality of the underlying collateral, subject to the Replenishment Criteria.
(4) The ability of the Tranche Amounts to withstand projected collateral loss rates under various stress scenarios.
(5) The legal structure as well as legal opinions addressing certain matters of the Issuer and the consistency with the Morningstar DBRS “Legal Criteria for U.S. Structured Finance” methodology.
(6) Morningstar DBRS’ assessment of the origination, servicing, and management capabilities of BMO.

The transaction is performing according to the parameters set in the Financial Guarantees. As of January 31, 2024, certain Replenishment Criteria were not met. Morningstar DBRS considered these failures in its analysis. The reference portfolio consists of well-diversified senior unsecured and senior secured corporate loans across various industries and rating levels. The analysis produced satisfactory results, which supported the confirmation and upgrade of the credit ratings on the Tranche Amounts and the Notes.

Morningstar DBRS analyzed the transaction using its CLO Insight Model, based on certain reference portfolio characteristics, including Eligibility Criteria and Replenishment Criteria, as defined per the Financial Guarantees; and tranche-specific recovery rates, among other credit considerations referenced in the Morningstar DBRS rating methodology “Global Methodology for Rating CLOs and Corporate CDOs (October 22, 2023)”, https://dbrs.morningstar.com/research/422269. The mapping was completed in accordance with Morningstar DBRS’ “Mapping Financial Institution Internal Ratings to Morningstar DBRS Credit Ratings for Global Structured Credit Transactions” methodology (February 17, 2023; https://www.dbrsmorningstar.com/research/410076).

The transaction assumptions consider Morningstar DBRS’ baseline macroeconomic scenarios for rated sovereign economies, available in its commentary “Baseline Macroeconomic Scenarios for Rated Sovereigns: December 2023 Update,” published on December 19, 2023 (https://dbrs.morningstar.com/research/425506). These baseline macroeconomic scenarios replace Morningstar DBRS’ moderate and adverse pandemic scenarios, which were first published in April 2020.

For more information regarding Morningstar DBRS’ additional adjustment for select industries related to COVID-19, please see its May 18, 2020, commentary, “CLO Risk Exposure to the Coronavirus Disease (COVID-19)” at https://dbrs.morningstar.com/research/361112.

ENVIRONMENTAL, SOCIAL, AND 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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030 (January 23, 2024).

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

The principal methodologies applicable to the credit rating are the Global Methodology for Rating CLOs and Corporate CDOs and the CLO Insight Model version 1.0.1.0 (October 22, 2023), https://dbrs.morningstar.com/research/422269 and Mapping Financial Institution Internal Ratings to Morningstar DBRS 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 credit ratings assigned to the Class C Notes and the Tranche C Amount materially deviate from the credit ratings implied by the predictive model. Morningstar DBRS 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(es) 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 credit 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.

Morningstar DBRS 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, Morningstar DBRS applied the senior secured and senior unsecured recovery rates defined in its “Global Methodology for Rating CLOs and Corporate CDOs” (October 22, 2023). Morningstar DBRS applies different recovery rates depending on the recovery tier and seniority.

Morningstar DBRS used its CLO Insight Model to determine expected default rates for the portfolio at each rating level. To determine the credit risk of each underlying reference obligation, Morningstar DBRS relied on either public ratings or a ratings mapping to Morningstar DBRS ratings of BMO’s internal ratings models. The mapping was completed in accordance with Morningstar DBRS’ “Mapping Financial Institution Internal Ratings to Morningstar DBRS Ratings for Global Structured Credit Transactions” methodology (February 17, 2023).

The last rating actions on this transaction took place on November 9, 2023, when Morningstar DBRS placed each of the credit ratings on the Tranche Amounts and the Notes Under Review with Developing Implications.

For further information on Morningstar DBRS 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 Morningstar DBRS 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: Glen Leppert, Senior Vice President, U.S. Structured Credit
Initial Rating Date: April 26, 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://dbrs.morningstar.com/about/methodologies.

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

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

-- Legal Criteria for U.S. Structured Finance (December 7, 2023), https://dbrs.morningstar.com/research/425081

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279.

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