DBRS Assigns Ratings to Taurus Corporate Financing LLP Facilities

DBRS Ratings Limited (DBRS) has today assigned ratings to the Senior Funding Facility (SFF) and the Mezzanine Funding Facility (MFF; together, the Facilities) to Taurus Corporate Financing LLP (the Borrower) in relation to TCF Loan Warehouse 3 Designated Activity Company (the Guarantor, TCF 3 DAC) as follows:

-- Senior Funding Facility rated A (sf)
-- Mezzanine Funding Facility rated 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 Final Termination Date in December 2031. The rating on the MFF addresses the timely payment of interest and the ultimate payment of principal payable on or before the Final Termination Date in December 2031. The warehouse documents were executed on 28 December 2016 and subsequently amended and restated on 31 January 2017 to reflect some additional changes.

The Borrower is a limited liability partnership incorporated in Guernsey as self-managed originator. The Guarantor 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, which will be collateralised by a portfolio of leveraged loans, floating-rate notes and high-yield bonds subject to certain Collateral Quality and Portfolio Profile Tests. The Facilities are drawn by the Borrower which in turn will fund the Guarantor via unsecured Profit Participating Notes (PPNs) to acquire the warehouse portfolio. The Instructing Investor has the Senior Secured claim on the Guarantor’s portfolio upon the Borrower’s default. The Borrower in all its current transactions including this warehouse has standard non-petition and limited recourse clauses and has no cross-default language. DBRS assumed it to be a bankruptcy-remote vehicle in its analysis. Chenavari Credit Partners LLP will act as the Borrower’s Manager Delegate (MD).

As of 27 January 2017, the transaction portfolio consisted of a collateral balance of EUR 121.51 million across 34 unique collateral loans and floating-rate notes; the Borrower will continue to draw on the Facilities based on a predetermined schedule as trades settle. Upon each drawing request, the Borrower will ensure that certain tests are in compliance with an asset-traded balance. As the trades settle in the warehouse portfolio, under the drawing schedule, the Senior and Mezzanine Lender will continue to fund the Facilities upon the Borrower’s request and thereby funding the Guarantor via PPNs. In its analysis, DBRS has considered the Senior and Mezzanine Lenders’ 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 earliest of the CLO Closing Date, the Optional Early Redemption Date, Mandatory Early Redemption Date or 28 December 2031. Mandatory Early Redemption can be caused by an event of default (EOD), and Optional Early Redemption can be caused at the option of key parties involved in the transaction. Other than an EOD, warehouse redemption can only occur if certain tests are satisfied. Subject to consent of the Senior and Mezzanine Lender, there could potentially be deficiency in the payment of ultimate principal if such options were exercised prior to the maturity of the warehouse. DBRS will continue to monitor the transaction.

Elavon Financial Services Designated Activity Company will act as the Accounts Bank. As per the transaction documentation, if the long-term debt 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 at least “A”.

DBRS conducted an operational review of the MD’s operations for collateralised loan obligations (CLOs) in December 2016 in London. The objective of the operational review was to assess the adequacy of the MD’s infrastructure and internal processes used to support investment decisions and portfolio monitoring. DBRS considers the origination and servicing practices of the MD to be consistent with current market practices as a whole.

DBRS has analysed a covenant matrix structure where total warehouse notional will be up to EUR 400 million with the equity notional of EUR 40 million. The first drawing point in a post-pricing scenario is expected to have total capitalisation of EUR 210 million, which constitutes an SFF size of EUR 150 million, an MFF size of EUR 20 million and the remaining EUR 40.0 million in equity. In pre-pricing scenarios, as the equity size gradually increases to EUR 40 million from EUR 6 million, the 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, and the relative credit enhancement decreases. As the size of the capital structure increases, Collateral Quality Tests such as the DBRS recovery rate, weighted-average (WA) spread and WA coupon also change. The maximum notional of the warehouse in the post-pricing scenario would be up to EUR 400 million, which constitutes an SFF size of EUR 302 million, an MFF size of EUR 58 million and a remainder of EUR 40 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 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 either use (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 internationally recognised statistical rating organisations; and (3) if no public ratings are available, then the Borrower or its MD will provide the 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 and the following analytical considerations:

-- The transaction structure, the form and sufficiency of available credit enhancement as well as the portfolio characteristics. Most of the portfolio profile tests are set at a portfolio notional amount 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 payments on the Facilities will accrue and are payable quarterly after a long first interest period.
-- 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 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 Barclays Bank Plc.

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

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

To assess the impact of any changes in 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):

Drawdown Structure of total EUR 400 million warehouse:
(1) For the first point in the matrix, in a post-pricing scenario, the warehouse notional amount is expected to be 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 the Risk Score by 30% will have no impact on the current rating of the Facilities.

(2) For the last point in the matrix, in a post-pricing scenario, the warehouse notional amount is expected to be EUR 400 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 MFF 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 MFF 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: 2 February 2017

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