DBRS Confirms Ratings on Senior Funding Facility and Mezzanine Funding Facility of Cairn Loan Opportunity VI B.V.

DBRS Ratings Limited (DBRS) has today confirmed the following ratings on the Senior Funding Facility and Mezzanine Funding Facility (together, the Facilities) of Cairn Loan Opportunity VI B.V. (the Borrower) following the change in the CLO Transaction Amount on 12 April 2016 from EUR 320 million to EUR 400 million:

-- Senior Funding Facility due December 2030: A (sf)
-- Mezzanine Funding Facility due December 2030: BBB (low) (sf)

The rating on the Senior Funding Facility (SFF) addresses the timely payment of interest and the ultimate payment of principal payable on or before the Warehouse Maturity Date in December 2030. The rating on the Mezzanine Funding Facility (MFF) addresses the ultimate payment of interest and the ultimate payment of principal payable on or before the Warehouse Maturity Date in December 2030. The abovementioned ratings only apply once the aggregate principal balance of the assets in the warehouse has reached EUR 50 million.

The Borrower is a limited liability private company incorporated under the laws of The Netherlands. The warehouse transaction is set up as a cash flow securitisation, which will be collateralised by a portfolio of leveraged loans and high-yield bonds subject to Collateral Quality and Portfolio Profile Tests. Cairn Loan Investments LLP (CLI) will act as the Collateral Manager of the Borrower.

As of 15 April 2016, the transaction portfolio of approximately EUR 87.61 million (on trade date basis) consists of senior secured term loans to 25 unique obligors, and the Borrower will continue to draw on the Facilities based on a predetermined schedule as the trades settle. Upon each purchase or sale of the assets during the reinvestment period, the Collateral Manager will ensure that collateral quality and certain other tests are in compliance. The warehouse has a nine-month reinvestment period followed by an amortisation period. The warehouse will reach its maturity date at the earlier of the CLO Closing Date, the Early Redemption Date or December 2030. Early redemption can be caused by an Event of Default (EoD) or at the option of key parties involved in the transaction. Other than EoD, warehouse redemption can only occur if certain tests are satisfied.

Elavon Financial Services Limited acts as the Accounts Bank, and Collateral Manager operates the Bank Accounts. As per the transaction documentation, if the rating of the Accounts Bank is either withdrawn or downgraded below “A,” such entity must be replaced within 30 calendar days by a financial institution with a DBRS public rating of “A.”

DBRS conducted an operational review of the Collateral Manager’s operations for Collateralised Loan Obligations (CLOs) in September 2015, in London. The objective of the operational review was to assess the adequacy of CLI’s infrastructure and internal processes used to support investment decisions and portfolio monitoring. DBRS considers the origination and servicing practices of CLI as a whole to be consistent with current market practices.

At the total capitalisation of EUR 50 million, the drawings will constitute as the size of SFF to be EUR 20 million, MFF size to be EUR 10 million and the remaining EUR 20 million in equity. The first drawing point in a post-pricing scenario is expected to be of total capitalisation of EUR 170 million, which constitutes the size of SFF to be EUR 127.5 million, MFF size to be EUR 2.5 million and the remaining EUR 40 million in equity. In pre-pricing scenarios, as the equity size gradually increases from EUR 20 million to EUR 40 million, MFF size can be increased or reduced to provide credit enhancement to the SFF. In post-pricing scenarios, both SFF and MFF increase in size with constant credit enhancement of 25% to SFF by way of equity of EUR 40 million and MFF. As the size of the capital structure increases, the covenants like DBRS Risk Score, DBRS Recovery Rate and Weighted Average Spread on the portfolio are generally kept static, while the Diversity Score increases with the size of the warehouse. The maximum notional of the warehouse in the post-pricing scenario would be EUR 320 million, which constitutes the size of SFF to be EUR 240 million, MFF size to be 40 million and the remainder of EUR 40 million in equity.

As the trades settle in the warehouse portfolio, under the drawing schedule Barclays Bank Plc (Senior and Mezzanine Lender) will continue to fund the Facilities upon Borrower’s request. In its analysis, DBRS has considered Barclays Bank Plc’s ability to fund the Facilities and it will continue to monitor the transaction as part of ongoing surveillance. Barclays Bank Plc currently has a long-term debt rating of A (high) with a Stable trend by DBRS.

DBRS used the publicly available CLO Asset Model to determine a lifetime pool default rate at the required rating levels. The CLO Asset Model takes key covenants of the portfolio to create a stressed modelling pool for each level of the drawing schedule based on the covenants. The CLO Asset Model employs a Monte Carlo simulation to determine cumulative default rates (or hurdle rates) at each rating stress level. Break-even default rates on the Facilities were determined in accordance with DBRS’s “Cash Flow Assumptions for Corporate Credit Securitizations” methodology. In the post-pricing scenarios, the Collateral Manager has the ability to purchase sterling-denominated assets up to GBP 9 million on an unhedged basis. DBRS has applied additional stresses to analyse this currency risk.

For the underlying collateral analysis, DBRS will use one of the following: (1) its own publicly available ratings of each obligor; (2) where such ratings are not available, DBRS will use publicly available obligor ratings from other nationally recognised statistical rating organisations; and (3) if no public ratings are available, then the Collateral Manager is under obligation to provide necessary information to DBRS to complete the Credit Estimate. Such Credit Estimates will be used to continuously monitor the transaction.

The ratings of the Facilities are based upon DBRS’s review of the abovementioned and the following analytical considerations:

-- The transaction structure, the form and sufficiency of available credit enhancement, and the portfolio characteristics. Most of the portfolio profile tests are set at portfolio notional of EUR 400 million at all times and DBRS created stressed modelling pools for its analysis based on these covenants.

-- The transaction parties’ financial strength and capabilities to perform their respective duties and the quality of origination, underwriting and servicing practices.

-- An assessment of the operational capabilities of key transaction participants.

-- The ability of the transaction to withstand stressed cash flow assumptions and repay lenders according to the terms of their investment. Interest and principal payments on the Facilities will accrue and payable quarterly.

-- The soundness of the legal structure and the presence of legal opinions that address the true sale of the assets to the Borrower and the non-consolidation of the Borrower, as well as consistency with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is “Rating CLOs and CDOs of Large Corporate Credit.” DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

A review of the transaction legal documents was not conducted, as the documents have remained unchanged since the most recent rating action.

Other methodologies referenced in this transaction are listed at the end of this press release. This may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies

For a more detailed discussion on the EU CLO warehouse financing, please refer to the commentary “DBRS CLO Insights” and the section “Growing Demand for Warehouse Financing in European CLOs,” found at http://dbrs.com/research/287175.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to the DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” found at http://www.dbrs.com/industries/bucket/id/10036/name/commentaries.

The sources of information used for these ratings include the parties involved in the ratings, including but not limited to the Collateral Manager, the Borrower and the Senior and Mezzanine Lender, Barclays Bank Plc.

DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

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

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

This is the first rating action since the Final Rating Date.

Information regarding DBRS ratings, including definitions, policies and methodologies is available on www.dbrs.com.

To assess the impact of a change in the transaction parameters on the current ratings, DBRS increased the Risk Score (deteriorated the weighted-average rating quality of the portfolio thereby increasing the default probability) by 15% and 30%, as compared to the parameters used to determine the rating (the Base Case). Such sensitivity analysis was conducted on three different drawing points assuming all other parameters remain unchanged:

(1) Total warehouse notional of EUR 50 million.
-- An increase in the Risk Score by 15% and 30% will have no impact on the current ratings of the Facilities.

(2) First drawing point in a post-pricing scenario would be at warehouse notional of EUR 170 million.
-- An increase in the Risk Score by 15% will have no impact on the MFF rating, while for the SFF rating it would lead to a downgrade to BBB (high) (sf).
-- An increase in Risk Score by 30% will have no impact on the MFF rating, while for the SFF it would lead to a downgrade to BBB (high) (sf).

(3) Last drawing point in a post-pricing scenario would be at notional of EUR 320 million.
--An increase in Risk Score by 15% will have no impact on the current ratings of the Facilities.
-- An increase in Risk Score by 30% will have no impact on the SFF rating, while for the MFF it would lead to a downgrade to BB (high) (sf).

For further information on DBRS historic default rates published by the European Securities and Markets Administration (ESMA) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Mudasar Chaudhry
Initial Rating Committee Chair: Jerry van Koolbergen
Initial Rating Date: 18 December 2015

DBRS Ratings Limited
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Registered in England and Wales: No. 7139960

The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.

-- Rating CLOs and CDOs of Large Corporate Credit
-- Legal Criteria for European Structured Finance Transactions
-- Cash Flow Assumptions for Corporate Credit Securitizations
-- Unified Interest Rate Model for European Securitisations

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