Morningstar DBRS Finalizes its Provisional Credit Rating on the Class E Notes Issued by Kawartha CAD Ltd., Boreal 2024-1

DBRS, Inc. (Morningstar DBRS) finalized its provisional credit rating of BB (high) on the Boreal Series 2024-1 Class E Notes (the Class E Notes) issued by Kawartha CAD Ltd. (the Issuer) referencing the executed Junior Loan Portfolio Financial Guarantees (the Financial Guarantee) dated as of April 15, 2024, between the Issuer as Guarantor and Bank of Montreal (BMO; rated AA with a Stable trend by Morningstar DBRS) as Beneficiary with respect to a portfolio of Canadian commercial real estate (CRE) secured loans originated or managed by BMO.

The credit rating on the Class E Notes addresses 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 to the Class E Notes is subject to the Beneficiary’s ability to pay the Guarantee Fee Amount (as defined in the Financial Guarantee).

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.

Morningstar DBRS’ credit rating on the Class E Notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the timely payment of interest (the Guarantee Fee Amount) and ultimate payment of principal on or before 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.

CREDIT RATING RATIONALE/DESCRIPTION
The credit rating is the result of Morningstar DBRS’ review of the transaction structure and the Financial Guarantees 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, dated as of April 15, 2024.
(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 Class E Notes 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 rating on the Class E Notes.

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 rating assigned to the Class E Notes. 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 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.

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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.