DBRS Comments on Amendments to Master Asset Vehicle II Transaction Documents

DBRS Limited (DBRS) notes that BlackRock Asset Management Canada Limited (formerly, BlackRock (Institutional) Canada Ltd., referred to as BlackRock), as administrator (the Administrator) of Master Asset Vehicle II (MAVII), Moelis & Company (Moelis), which represents a number of holders of MAVII notes, a committee representing the holders of MAVII notes (the MAVII Noteholder Committee), the MAVII trustees and all lenders and dealers that are a party to the MAVII transaction documents that were entered into as part of the ABCP Restructuring on January 21, 2009 (the MAVII Transaction Documents), have collectively drafted and agreed to recently executed amendments to the MAVII Transaction Documents (the Amendments). The purpose of the Amendments is to provide the holders of MAVII notes the ability to redeem their notes prior to their legal final maturity date, in vertical strips (whether submitted as such, or constructed from individual Classes of notes) of Class A-1 Notes, Class A-2 Notes, Class B Notes and Class C Notes (collectively, the MAVII Notes), each equal to $1,000,000 in aggregate, with a proportionate amount of each asset held by MAVII backing the MAVII Notes (including swaps and cash) also being redeemed, novated or terminated, as applicable (referred to as a Vertical Redemption Unwind). Moelis, together with legal advisors to certain MAVII Noteholders, structured the initial amendment proposal, which has been refined and finalized in the Amendments with input from the above-mentioned parties. The MAVII Noteholder Committee was given the authority by an Extraordinary Resolution, passed by MAVII Noteholders on August 30, 2012, to negotiate and agree to the final Amendments on behalf of MAVII Noteholders. The MAVII Noteholder Committee passed a resolution on October 2, 2013, agreeing to the final Amendments prior to executing them on behalf of the MAV II Noteholders.

As part of the process to obtain consents from all of the relevant parties to the MAVII Transaction Documents prior to executing the Amendments, DBRS was requested to review the Amendments and determine whether they satisfy the Rating Agency Condition (RAC), as defined in the MAVII Transaction Documents (and also as defined in DBRS’s “Legal Criteria for Canadian Structured Finance,” which can be found at www.dbrs.com). Satisfaction of the Rating Agency Condition means that the proposed action or amendment, as the case may be, will not, in and of itself, result in a downgrade or withdrawal of the current rating on the relevant notes rated by DBRS. Since DBRS currently rates only the MAVII Class A-1 Notes (AA (low), as confirmed in June 2013) and the MAVII Class A-2 Notes (upgraded to A (low) in June 2013) (collectively, the Class A Notes), the request for satisfaction of the RAC in relation to the Amendments only applies to the Class A Notes.

DBRS reviewed the proposed Vertical Redemption Unwind process and the Amendments, and conducted the analysis necessary to determine whether the Amendments could, in and of themselves, result in a downgrade or withdrawal of the current ratings on the Class A Notes. DBRS concluded that, notwithstanding certain non-quantifiable risks in relation to the Amendments as noted below, the Amendments would not, in and of themselves, result in a downgrade or withdrawal of the current ratings on the Class A Notes at this time. As a result, DBRS issued a letter to the Administrator and the issuer trustee of MAVII indicating that the Amendments satisfy RAC on the date the Amendments were signed. DBRS notes that its conclusion, that the Amendments satisfy RAC, does not signify its approval of the proposed Vertical Redemption Unwind process or the Amendments, nor does it signify that DBRS considers the Vertical Redemption Unwind process or the Amendments to be beneficial or detrimental to MAVII Noteholders. DBRS also notes that satisfaction of RAC is not a rating confirmation of the Class A Notes.

DBRS has regularly informed the market of the MAVII structure and any updates or changes to it since initially assigning ratings to the Class A Notes on January 21, 2009. For more details on MAVII, please see the MAVII rating report, which can be found at www.dbrs.com. As noted in the MAVII rating report, there are already certain non-quantifiable risks in the legal and structural aspects of MAVII, which have resulted in the rating of the Class A Notes being somewhat constrained. As indicated in the MAVII rating report, DBRS remains concerned about the amount of discretion afforded to the Administrator, which is not market standard for Canadian securitizations or structured credit transactions. The amount of discretion afforded to the Administrator is potentially exacerbated by the Amendments, as described in more detail below.

BlackRock will continue to act as Administrator of MAVII, and will also act as the redemption administrator and liquidation agent on behalf of all parties taking part in any Vertical Redemption Unwinds. Since each of these roles that BlackRock will be engaged to perform serves to benefit different parties in some cases, a conflict of interest may arise, which has the potential to affect MAVII Noteholders and, possibly, the rating on the Class A Notes, in the event that this results in payment delays, deterioration of the credit enhancement or claims made against MAVII that MAVII is unable to satisfy without using the current credit enhancement backing the MAVII Notes. As DBRS notes in the MAVII rating report, the Administrator’s standard of care is weaker than the market standard for administrators in Canadian securitizations and structured credit transactions, as it is not a fiduciary standard. DBRS also indicated in the MAVII rating report that the Administrator’s liability is capped at a small percentage of the outstanding MAVII Notes, which is also not standard for administrators in Canadian securitizations and structured credit transactions. The same weaker-than-market standard of care and non-standard liability cap will apply to BlackRock acting in its capacity as redemption administrator in respect of Vertical Redemption Unwinds under the terms of the Amendments. In the event that MAVII incurs losses, liabilities or claims against it as a result of the Administrator or redemption administrator, BlackRock will only be liable to MAVII in each capacity up to the amount of its contractual limitation of liability.

Another potential risk that may be exacerbated by the Amendments pertains to currency risk. The MAVII Transaction Documents do not require the Administrator to enter into currency hedges at all times, notwithstanding a mismatch between U.S. dollar (USD) assets and USD liabilities. DBRS notes that USD MAVII Notes are not eligible for redemption pursuant to the Vertical Redemption Unwind process. As a result, the currency risk faced by MAVII will increase as Canadian dollar (CAD) MAVII Notes are redeemed. The parties to the Amendments attempted to mitigate this risk by including a foreign exchange limit condition in the Amendments, so that a Vertical Redemption Unwind could not take place if as a result of the Vertical Redemption Unwind, the CAD equivalent of the principal value of outstanding USD MAVII Notes would exceed 7.5% of the CAD equivalent of the principal value of all outstanding MAVII Notes at that time, without satisfying RAC. Notwithstanding this condition to Vertical Redemption Unwinds, there is still the potential for currency risk to have an impact on the current credit enhancement, particularly as Vertical Redemption Unwinds take place, unless the Administrator enters into hedges on behalf of MAVII to mitigate this risk.

Another non-quantifiable risk that DBRS considers as possibly having a future impact on MAVII Notes relates to potential claims being made against MAVII. To the extent that significant claims are made against MAVII in connection with events occurring prior to, or in connection with, any Vertical Redemption Unwinds, that MAVII must either defend and/or is found liable for, this could also potentially have an impact on the current enhancement backing the MAVII Notes and/or payments to MAVII Noteholders. In an attempt to mitigate this risk, the parties to the Amendments included a requirement for at least 3% of the amount of each Vertical Redemption Unwind (the Indemnity Holdback Amount) to be set aside in a separate bank account for purposes of meeting indemnity claims against MAVII for the first two years after each Vertical Redemption Unwind. The Indemnity Holdback Amount decreases to 0.5% after two years following each Vertical Redemption Unwind. In the event that claims are made against MAVII in excess of the amount of the Indemnity Holdback Amount available at any time, or in the event that MAVII is not able to access the Indemnity Holdback Amount for any reason, notwithstanding the structural elements that have been put in place pursuant to the Amendments to mitigate that risk, MAVII may need to use its own assets (i.e., the credit enhancement backing the MAVII Notes) to satisfy such claims, which could have a potential impact on the ratings of the Class A Notes, if the amount of such claims are significant enough.

DBRS also notes that various deal parties, including the Administrator and redemption administrator, are under certain circumstances able to make indemnity claims against MAVII, which may be covered by the Indemnity Holdback Amount, potentially decreasing the amount MAVII has available to meet other claims from the Indemnity Holdback Amount, if any. As such, the risk that MAVII may need to use its own assets (i.e., the credit enhancement backing the MAVII Notes) to satisfy any claims may increase if this occurs, and may ultimately have a potential impact on the ratings of the Class A Notes if, as above, the amount of any such claims are significant enough.

DBRS will continue to monitor the Class A Notes and Vertical Redemption Unwinds as they occur, and will take any rating action it considers necessary in light of the information available to it.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Rating Methodology for CLOs and CDOs of Large Corporate Credit (February 2012), Canadian Surveillance Methodology for CDOs of Large Corporate Credit (June 2013) and Legal Criteria for Canadian Structured Finance (September 2013), which can be found on our website under Methodologies.