Morningstar DBRS Finalises Provisional Credit Ratings on Palmer Square European Loan Funding 2024-2 DAC

DBRS Ratings Limited (Morningstar DBRS) finalised its provisional credit ratings on the following classes of notes issued by Palmer Square European Loan Funding 2024-2 DAC (the Issuer):

-- Class A Senior Secured Floating Rate Notes (Class A Notes) at AAA (sf)
-- Class B Senior Secured Floating Rate Notes (Class B Notes) at AA (sf)
-- Class C Senior Secured Deferrable Floating Rate Notes (Class C Notes) at A (sf)
-- Class D Senior Secured Deferrable Floating Rate Notes (Class D Notes) at BBB (sf)
-- Class E Senior Secured Deferrable Floating Rate Notes (Class E Notes) at BB (sf) and, together with the Class A Notes, the Class B Notes, the Class C Notes, and the Class D Notes, the Rated Notes)

Morningstar DBRS did not assign a credit rating to the Subordinated Notes.

The credit ratings on the Class A Notes and the Class B Notes address the timely payment of interest and ultimate payment of principal by the legal final maturity date. The credit ratings on the Class C Notes, the Class D Notes, and the Class E Notes address the ultimate payment of principal and interest by the final maturity date (15 May 2034).

CREDIT RATING RATIONALE
The Issuer is a static cash flow collateralised loan obligation (CLO) transaction collateralised by a EUR 625 million portfolio of primarily floating-rate senior-secured loans and bonds to high-yield corporate borrowers. The portfolio is serviced by Palmer Square Europe Capital Management LLC.

The portfolio consists of 209 loans and bonds granted to 187 borrowers across Europe, the United States, Singapore, and Canada. The majority of the portfolio (91.0% by par balance) consists of senior-secured loans, including 3.5% (by par balance) of cov-lite loans. The remaining consist of high-yield secured bonds (7.5%) and high-yield unsecured bonds (1.5%).

Morningstar DBRS determined its credit ratings based on the principal methodology and the following considerations:
(1) The transaction's capital structure and the form and sufficiency of available credit enhancement to withstand projected collateral loss rates under various cash flow stress scenarios and repay the Issuer's financial obligations according to the terms under which the notes are issued.

(2) The static nature of the portfolio which, coupled with the sequential amortisation structure, will allow the transaction to deleverage quicker than transactions with a reinvestment period.

(3) Morningstar DBRS' assessment of the portfolio quality, including:
-- The weighted-average risk score (WARS) of 21.75% equivalent to an obligor average credit quality of B;
-- The weighted-average life (WAL) of 4.45 years;
-- The high percentage of senior-secured loan obligations (98.48% of the portfolio) leading to high recovery rate expectations; and
-- The portfolio diversification: the top three industries represent 37.8% of the portfolio balance while the top one, five, and 10 borrowers represent 0.9%, 4.4%, and 8.4% of the portfolio balance, respectively.
(4) Liquidity support: The transaction benefits from a EUR 5.6 million interest reserve account as well as an interest smoothing account mechanism among other features that aim to mitigate liquidity risk to the transaction.

(5) The exposure to the transaction account bank and the downgrade provisions outlined in the transaction documents.

(6) Morningstar DBRS' assessment of Palmer Square Capital Management's CLO management capabilities.

COUNTERPARTIES
Citibank N.A., London Branch (Citibank London) has been appointed as the Issuer's account bank and custodian for the transaction. Morningstar DBRS privately rates Citibank London and publicly rates its parent, Citibank, N.A., at AA (low) with a Stable trend. The transaction documents contain downgrade provisions relating to the account bank that are consistent with Morningstar DBRS' criteria.

Morningstar DBRS' credit rating on the Rated Notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related interest payment amounts and the related class balances.

Morningstar DBRS' credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations.

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.

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 Factors in Credit Ratings (13 August 2024) at https://dbrs.morningstar.com/research/437781.

Morningstar DBRS analysed the transaction structure in its proprietary cash flow engine considering the default rates at which the Rated Notes did not return all specified cash flows.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit ratings is Global Methodology for Rating CLOs and Corporate CDOs and CLO Insight Model v1.0.1.2 (23 February 2024), https://dbrs.morningstar.com/research/428544.

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

Morningstar DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit ratings, please refer to Appendix C: The Impact of Sovereign Ratings on Other Morningstar DBRS Credit Ratings of the Global Methodology for Rating Sovereign Governments at: https://dbrs.morningstar.com/research/436000.

The sources of data and information used for these credit ratings include Palmer Square Europe Capital Management LLC and J.P. Morgan Securities plc and include loan-level characteristics of the portfolio including information on borrower ratings, loan amounts, seniority, coupon rates, and maturity dates as at 27 August 2024.

Morningstar DBRS did not rely upon third-party due diligence in order to conduct its analysis.

Morningstar DBRS was not supplied with third-party assessments. However, this did not affect the credit rating analysis.

Morningstar DBRS considers the data and information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

Morningstar DBRS does not audit or independently verify the data or information it receives in connection with the credit rating process.

These credit ratings concern newly issued financial instruments. These are the first Morningstar DBRS credit ratings on these financial instruments.

This is the first credit rating action since the Initial Rating Date.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com.

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the credit ratings, Morningstar DBRS considered the following stress scenarios as compared with the parameters used to determine the credit ratings (the base case):

-- Risk Scores Used: Base case WARS of 21.75% for the target portfolio, a 15% and 30% increase on the base case risk scores.
-- Recovery Rates Used: Base case recovery rates, a 15% and 30% decrease in the base case recovery rate.

Morningstar DBRS concludes that a hypothetical increase of the base case risk score by 15% or a hypothetical decrease of the recovery rate by 15%, ceteris paribus, would each have a low potential negative rating impact on the Rated Notes. A hypothetical increase of the base case risk score by 30% would have a low potential negative rating impact on the Rated Notes. A hypothetical decrease of the recovery rate by 30%, ceteris paribus, would have a low potential negative rating impact on the Class A, and Class B Notes and have a medium potential negative rating impact on the Class C, Class D and Class E Notes. Low suggests a possible downgrade impact of 0 to 2 notches below the assigned credit rating. Medium suggests a possible downgrade impact of 3 to 5 notches below the assigned credit rating. High suggests a possible downgrade impact of 6 or more notches below the assigned credit rating.

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.

These credit ratings are endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Carlos Silva, Senior Vice President, Sector Lead
Rating Committee Chair: Jerry van Koolbergen, Managing Director
Initial Rating Date: 22 July 2024

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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.

-- Global Methodology for Rating CLOs and Corporate CDOs and CLO Insight Model v1.0.1.2
(23 February 2024), https://dbrs.morningstar.com/research/428544
-- Rating European Structured Finance Transactions Methodology (25 June 2024), https://dbrs.morningstar.com/research/434970
-- Legal Criteria for European Structured Finance Transactions (28 June 2024), https://dbrs.morningstar.com/research/435165
-- Operational Risk Assessment for Collateralized Loan Obligations (CLOs) and Corporate Collateralized Debt Obligations (CDOs) (23 August 2024), https://dbrs.morningstar.com/research/438315
-- Interest Rate Stresses for European Structured Finance Transactions (28 June 2024), https://dbrs.morningstar.com/research/435278
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024), https://dbrs.morningstar.com/research/437781

A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/278375.

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