Morningstar DBRS Assigns Provisional Credit Ratings to Certain Tranche Amounts of Kawartha CAD Ltd., Boreal 2024-1

DBRS, Inc. (Morningstar DBRS) assigned the following provisional credit ratings to the Senior Tranche, the Tranche B, the Tranche C, the Tranche D, and the Tranche E (collectively, the Tranche Amounts) of Kawartha CAD Ltd. (the Issuer) pursuant to Schedule 1 of the executed Junior Loan Portfolio Financial Guarantee (the Financial Guarantee) dated April 15, 2024, between the Issuer as Guarantor and the Bank of Montreal (BMO) as Beneficiary with respect to a portfolio of Canadian commercial real estate (CRE) secured loans originated or managed by BMO (rated AA with a Stable trend by Morningstar DBRS):

-- Senior Tranche at AAA (sf)
-- Tranche B at AA (low) (sf)
-- Tranche C at A (sf)
-- Tranche D at BBB (low) (sf)
-- Tranche E at BB (high) (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 provisional credit ratings on the Tranche Amounts take into consideration only the creditworthiness of the reference portfolio. The provisional credit ratings neither address counterparty risk nor the likelihood of any event of default or termination event under the agreement occurring. BMO bought protection under the Financial Guarantee for certain issued notes in respect of such Protected Tranche (as defined in the Financial Guarantee).

Morningstar DBRS’ provisional credit ratings on the Tranche Amounts are expected to remain provisional until there is an executed Financial Guarantee agreement covering the payment obligations and exchange of risk in respect of such Tranche Amounts. BMO may have no intention of executing such a Financial Guarantee. 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 credit 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 credit rating to a facility sufficient to assess portfolio credit quality.

Morningstar DBRS’ credit ratings on the Tranche Amounts address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are a reduction to the respective Tranche Initial Notional Amounts (as defined in the Financial Guarantee) resulting from obligor defaults within the guaranteed portfolio during the period from the Effective Date until the Scheduled Termination Date.

Morningstar DBRS’ long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

RATING RATIONALE
The provisional credit ratings are the result of Morningstar DBRS’ review of the transaction structure and Financial Guarantee of Kawartha CAD Ltd., a corporation established under the Canada Business Corporations Act. Kawartha CAD Ltd., Boreal 2024-1 is a synthetic risk transfer transaction with BMO as the Beneficiary.

In its analysis, Morningstar DBRS considered the following:
(1) The Financial Guarantee.
(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.

Morningstar DBRS analyzed the transaction using its CMBS Insight Model and CLO Insight Model, based on certain reference portfolio characteristics, including Eligibility Criteria and Replenishment Criteria, as defined in the Financial Guarantee. The reference portfolio consists of well-diversified CRE secured loans across various obligors. The analysis produced satisfactory results, which supported the credit ratings on the Tranche Amounts.

The transaction assumptions consider Morningstar DBRS’ baseline macroeconomic scenarios for rated sovereign economies, available in its commentary “Baseline Macroeconomic Scenarios for Rated Sovereigns: March 2024 Update,” published on March 27, 2024 (https://dbrs.morningstar.com/research/430189). These baseline macroeconomic scenarios replace Morningstar DBRS’ moderate and adverse coronavirus pandemic scenarios, which were first published in April 2020.

For more information regarding Morningstar DBRS’ additional adjustment for select industries related to the coronavirus pandemic, 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
Environmental (E) Factors
The following E factor had a relevant effect on the credit analysis: The portfolio of 539 exposures includes 19 loans, representing 5.8% of the total guaranteed obligation amount, backed by properties that have been flagged for environmental issues. This E factor has a relevant effect on the credit analysis of the transaction because Morningstar DBRS includes a penalty for the loss given default (LGD) estimate for loans flagged with environmental issues, which increases the estimated required credit enhancement at each rating level.

There were no Social or Governance factors that had a relevant or significant 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 (January 23, 2024) at: https://dbrs.morningstar.com/research/427030.

Notes:
The principal methodologies applicable to the credit ratings are Global Methodology for Rating CLOs and Corporate CDOs, including its Appendix II: Mapping Financial Institution Internal Ratings to Morningstar DBRS Credit Ratings for Global Structured Credit Transactions, and the CLO Insight Model version 1.0.1.0 (February 23, 2024) https://dbrs.morningstar.com/research/428544 and North American CMBS Multi-Borrower Rating Methodology and North American CMBS Insight Model 1.2.0.0 (March 1, 2024) https://dbrs.morningstar.com/research/428797.

Other methodologies referenced in this transaction are listed at the end of this press release.

Morningstar DBRS materially deviated from its principal methodologies when determining the credit ratings assigned to the Tranche Amounts. The LGD assumptions for the CRE Builder Developer portion of the guaranteed portfolio were derived via BMO’s LGD estimates and historical realized LGDs, rather than as part of any primary or related methodologies. The material deviation is warranted given that no primary or related methodology governs the application of LGD assumptions for CRE Builder Developer loans.

The credit ratings were 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.

A provisional credit rating is not a final credit rating with respect to the above-mentioned Tranche Amounts and may change or be different from the final credit rating assigned or may be discontinued. The assignment of the final credit ratings on the above-mentioned Tranche Amounts are subject to receipt by Morningstar DBRS of all data and/or information and final documentation that Morningstar DBRS deems necessary to finalize the credit ratings.

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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 CLOs and CDOs (September 14, 2023),
https://dbrs.morningstar.com/research/420608.

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

Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024),
https://dbrs.morningstar.com/research/428623

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.