Morningstar DBRS Confirms Provisional Credit Ratings on the Tranche Amounts of Granville USD Ltd.

DBRS, Inc. (Morningstar DBRS) confirmed its following provisional credit ratings on the Tranche A1, the Tranche A2, the Tranche B1, the Tranche B2, the Tranche C1, and the Tranche C2 (collectively, the Tranche Amounts) of Granville USD Ltd., pursuant to Schedule 2 of the Financial Guarantee, dated as of July 27, 2023, entered into between Granville USD Ltd., as Guarantor, and The Bank of Nova Scotia (rated AA with a Stable trend by Morningstar DBRS), as Beneficiary, with respect to certain issued credit-linked notes (the Notes) referencing a portfolio of primarily U.S. and Canadian senior unsecured and senior secured loans originated or managed by The Bank of Nova Scotia:

-- Tranche A1 at AAA (sf)
-- Tranche A2 at AAA (sf)
-- Tranche B1 at AA (high) (sf)
-- Tranche B2 at AA (low) (sf)
-- Tranche C1 at A (high) (sf)
-- Tranche C2 at A (low) (sf)

The provisional credit ratings on the Tranche Amounts address the likelihood of a reduction to the respective Tranche Amounts resulting from obligor defaults within the guaranteed portfolio during the period from the Effective Date until the Scheduled Termination Date (as defined in the Financial Guarantee). For obligors within the guaranteed portfolio, default events are limited to payment default, insolvency, and restructuring events.

The provisional credit ratings take into consideration only the creditworthiness of the reference portfolio. The ratings do not address counterparty risk nor the likelihood of any event of default or termination events under the agreement occurring.

The Bank of Nova Scotia entered into the Financial Guarantee in respect of certain issued Notes. The Bank of Nova Scotia did not request that Morningstar DBRS assign credit ratings to the Notes. The payment of principal and interest (the Guarantee Fee Amount, as defined in the Financial Guarantee) on the Notes is subject to additional counterparty credit risk associated with the Beneficiary’s ability to pay such amounts. As a result, if Morningstar DBRS were to rate such Notes, even if they are pari passu with a related Tranche Amount, Morningstar DBRS’ credit ratings on the Notes may be different than the credit ratings assigned to the related Tranche Amounts.

Morningstar DBRS expects its credit ratings on the Tranche Amounts 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. The Bank of Nova Scotia 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 The Bank of Nova Scotia’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.

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, initially released on October 22, 2023. On November 9, 2023, the provisional credit ratings were placed Under Review with Developing Implications to allow Morningstar DBRS to review the provisional credit ratings using the CLO Methodology.

Granville USD Ltd. is a synthetic risk transfer transaction with The Bank of Nova Scotia as the Beneficiary. The Scheduled Termination Date is July 31, 2031. The Replenishment Cut-Off Date is July 31, 2026.

The credit ratings reflect the following considerations:

(1) The Financial Guarantee.
(2) The integrity of the transaction structure.
(3) Morningstar DBRS’ assessment of the portfolio quality.
(4) Adequate credit enhancement to withstand projected collateral loss rates.

Morningstar DBRS monitors transaction performance metrics based on the periodicity of the transaction’s reporting. The transaction is performing according to the parameters set in the Financial Guarantee. As of January 31, 2024, all the transaction’s Replenishment Criteria were met, which supports the confirmations on the provisional credit ratings. The reference portfolio consists of well-diversified senior unsecured and senior secured corporate loans across various industries and credit rating levels.

Morningstar DBRS’ provisional 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 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
There were no Environmental/Social/Governance factors 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 methodology applicable to the credit ratings is 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 (February 23, 2024; https://dbrs.morningstar.com/research/428544).

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

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 these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

DBRS, Inc.
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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 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 (February 26, 2024),
https://dbrs.morningstar.com/research/428623
-- Legal Criteria for U.S. Structured Finance (April 15, 2024),
https://dbrs.morningstar.com/research/431205

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