DBRS Confirms Ratings on the Senior Funding Facility and Senior Mezzanine Funding Facility of Cadogan Square CLO VIII D.A.C.

DBRS Ratings Limited (DBRS) has today confirmed the ratings on the Senior Funding Facility (SFF) and the Senior Mezzanine Funding Facility (SMFF; together with SFF, the Facilities) of Cadogan Square CLO VIII D.A.C. (the Borrower) following amendments to the Collateral Quality Tests and upsizing of the CLO Transaction Amount, which became effective on 30 November 2016, as follows:

-- SFF at A (sf)
-- SMFF at BBB (low) (sf)

The rating on the SFF addresses the timely payment of interest and the ultimate payment of principal payable on or before the Warehouse Maturity Date in July 2031. The rating on the SMFF addresses the ultimate payment of interest and principal payable on or before the Warehouse Maturity Date in July 2031.

The Borrower is a designated activity company incorporated under the laws of the Republic of Ireland. The warehouse transaction is set up as a cash flow securitisation and is collateralised by a portfolio of leveraged loans and high-yield bonds subject to Eligibility Criteria, Collateral Quality and Portfolio Profile Tests. Credit Suisse Asset Management Limited (CSAM) will act as the Collateral Manager of the Borrower.

As at 24 November 2016, the transaction portfolio with an Aggregate Principal Balance of approximately EUR 317.6 million (on a trade-date basis) consisted of senior secured bonds and term loans extended to 89 issuers. The Borrower will continue to draw on the Facilities based on a predetermined schedule. Upon each drawing request, CSAM will ensure that certain tests are in compliance. As the trades settle in the warehouse portfolio, Barclays Bank PLC (rated A (high), Negative trend, by DBRS; the Senior and Senior Mezzanine Lender) will, under the drawing schedule, continue to fund the Facilities upon the Borrower’s request. In its analysis, DBRS considered Barclays Bank PLC’s ability to fund the Facilities, and it will continue to monitor the transaction as part of ongoing surveillance.

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 Early Redemption Date or July 2031. Early redemption can be caused by an Event of Default (EoD) or at the option of the key parties involved in the transaction. Other than an EoD, warehouse redemption can only occur if certain tests are satisfied.

Bank of New York Mellon – The London Branch (rated AA, Stable trend, by DBRS) acts as the Account Bank, and CSAM operates 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.

On 30 November 2016, the transaction parties signed a Deed of Amendment to implement the following changes on the transaction:

-- Increase of the CLO Transaction Amount to EUR 460.0 million from EUR 400.0 million.
-- Increase of the Total Senior Commitment Amount and Total Senior Mezzanine Commitment Amount to EUR 346.5 million and EUR 73.5 million.
-- Amendments to the Collateral Quality Tests.

The current total capitalisation of EUR 189.1 million consists of an SFF size of EUR 144.1 million, an SMFF size of EUR 5.0 million and EUR 40.0 million in equity.

Following the amendment, the first drawing point in a post-pricing scenario was expected to have total capitalisation of EUR 170.0 million, which constitutes an SFF size of EUR 125.0 million, an SMFF size of EUR 5.0 million and EUR 40.0 million in equity. In post-pricing scenarios, both the SFF and the SMFF increase in size and the relative credit enhancement decreases. As the size of the capital structure increases, the Collateral Quality Tests, such as the DBRS Weighted-Average Recovery Rate, Weighted-Average Spread and Weighted-Average Coupon, also change. The maximum notional of the warehouse in the post-pricing scenario would be EUR 460.0 million, which constitutes an SFF size of EUR 346.5 million, an SMFF size of EUR 73.5 million and EUR 40.0 million in equity.

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’s 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 uses 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 the 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 on DBRS’s review of the above-mentioned as well as 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 a portfolio notional of EUR 460.0 million at all times, and DBRS created stressed modelling pools for its analysis based on these covenants.

-- 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 the 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 are 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.

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

These 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 the 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, CSAM, the Senior and Senior Mezzanine Lender and the Trustee, BNY Mellon Corporate Trustee Services Limited.

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 to be 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 is the first rating action since the Initial Rating Date.

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

To assess the impact of the changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

(1) Total warehouse notional of EUR 320 million:
-- An increase in Risk Score by 15% will have no impact on the SFF rating, whereas it would lead to a downgrade to BB (high) (sf) for the SMFF rating.
-- An increase in Risk Score by 30% will have no impact on the SFF rating, whereas it would lead to a downgrade to BB (sf) for the SMFF rating.

(2) Total warehouse notional of EUR 460 million:
-- An increase in Risk Score by 15% will have no impact on the SFF rating, whereas it would lead to a downgrade to BB (high) (sf) for the SMFF rating.
-- An increase in Risk Score by 30% will have no impact on the SFF rating, whereas it would lead to a downgrade to BB (low) (sf) for the SMFF rating.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (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, Vice President
Rating Committee Chair: Jerry van Koolbergen, Managing Director
Initial Rating Date: 8 August 2016

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor, London EC3M 3BY United Kingdom
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
-- Unified Interest Rate Model for European Secuitisations
-- Cash Flow Assumptions for Corporate Credit Securitizations

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