DBRS Finalises Provisional Ratings on Senior Funding Facility and Mezzanine Funding Facility of Dryden 46 Euro CLO 2016 B.V.

DBRS Ratings Limited (DBRS) has today finalised the following provisional ratings on the Senior Funding Facility and Mezzanine Funding Facility (together, the Facilities) of Dryden 46 Euro CLO 2016 B.V. (the Borrower):

-- Senior Funding Facility: A (sf)
-- Mezzanine Funding Facility: 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 Termination Date in June 2031. 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 Termination Date in June 2031. The abovementioned ratings only apply once the aggregate principal balance of the assets (based on committed trades) in the warehouse has reached at least EUR 50 million (as per clause 6.3(d) of the Warehouse Deed).

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 Eligibility Criteria, Collateral Quality and Portfolio Profile Tests. PGIM Limited (PGIM) will act as the Collateral Manager of the Borrower.

As of the final rating date, the transaction portfolio of approximately EUR 61.84 million (on a trade date basis) consists of collateral obligations of 13 unique obligors, and the Borrower will continue to draw on the Facilities based on a predetermined schedule. Upon each purchase or sale of the assets during the reinvestment period, the Collateral Manager will ensure that collateral quality tests and certain other tests are in compliance. The warehouse has a 12-month reinvestment period followed by an amortisation period. The warehouse will reach its maturity date at the earlier of the CLO Closing Date, the Final Distribution Date or June 2031. 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 and the Borrower is able to provide satisfactory evidence that rated facilities will be repaid in full.

Elavon Financial Services Limited will act as the Account Bank, and the Collateral Manager will operate the borrower accounts. As per the transaction documentation, if the rating of the Account Bank is either withdrawn or downgraded below “A” by one or more rating agencies, such entity must be replaced within 30 calendar days by a financial institution with a public rating of “A” by one or more rating agencies.

DBRS conducted an operational review of the Collateral Manager’s operations for Collateralised Loan Obligations (CLOs) in May 2016 in London. The objective of the operational review was to assess the adequacy of PGIM’s infrastructure and internal processes used to support investment decisions and portfolio monitoring. DBRS considers the origination and servicing practices of PGIM as a whole to be consistent with current market practices.

At the total capitalisation of EUR 50 million, the drawings will constitute the size of SFF to be EUR 10 million, the size of MFF to be EUR 20 million and the remaining EUR 20 million to be in equity. The first drawing point in a post-pricing scenario is expected to be of total capitalisation of EUR 210 million, which constitutes the size of SFF to be EUR 147.5 million, MFF to be EUR 12.5 million and the remaining EUR 50 million to be in equity. In pre-pricing scenarios, as the equity size gradually increases from EUR 10 million to EUR 50 million, MFF’s size can be increased or reduced to provide credit enhancement to the SFF. In post-pricing scenarios, both SFF and MFF increase in size and the relative credit enhancement decreases. As the size of the capital structure increases, the covenants like DBRS Risk Score, DBRS Recovery Rate and Weighted Average Spread 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 300 million, which constitutes the size of SFF to be EUR 215 million, MFF to be EUR 35 million and the remaining EUR 50 million to be 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 the Borrower’s request. In its analysis, DBRS has considered the 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 DBRS long-term debt rating of A (high) with a Negative trend.

DBRS used the publicly available CLO Asset Model to determine a lifetime pool default rate at the required rating levels for each drawing point. 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.

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 Senior Lender 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, 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 Borrower is able to enter into sub-participation arrangements with Barclays in one or more of its own assets in post-pricing scenarios subject to same conditions of Sale of Collateral Obligations.

-- The Borrower may purchase Ineligible Assets which can only be funded by the subordinated noteholders. Any sales, purchases or proceeds of Ineligible Assets are separate from Eligible Assets of the Borrower and are not part of the Priority of Payments.

-- 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 which 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.

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

The sources of information used for this rating include the Borrower, the Collateral Manager and the Senior and Mezzanine Lender.

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

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 rating was disclosed to the Borrower, Senior and Mezzanine Lender and transaction legal counsel.

This rating concerns a newly issued financial instrument. This is the first DBRS rating on this financial instrument.

Information regarding DBRS ratings, including definitions, policies and methodologies are 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 210 million.
-- An increase in the Risk Score by 15% will have no impact on the current rating of the facilities.
-- 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 A (low) (sf).

(3) Last drawing point in a post-pricing scenario would be at notional of EUR 300 million.
-- An increase in Risk Score by 15% will have no impact on the SFF rating while for the MFF rating it would lead to a downgrade to BB (high) (sf).
-- 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.

Initial Lead Analyst: Mudasar Chaudhry, Vice President
Initial Rating Date: 8 August 2016
Initial Rating Committee Chair: Jerry van Koolbergen, Managing Director

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.

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

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