DBRS Finalises Provisional Ratings on Jubilee CLO 2017-XVIII B.V.

DBRS, Inc. (DBRS) has today finalised the provisional ratings on the Senior Funding Facility (SFF) and Mezzanine Funding Facility (MFF; together, the Facilities) of Jubilee CLO 2017-XVII B.V. (the Borrower) as follows:

-- SFF rated A (sf)
-- MFF 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 Warehouse Maturity Date in June 2031. The rating on the 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 warehouse documents were executed on 21 December 2016.

The Borrower is a limited liability company incorporated under the laws of the Kingdom of the Netherlands (rated AAA with a Stable trend by DBRS). 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 certain Collateral Quality and Portfolio Profile Tests. Alcentra Limited (Alcentra) will act as the Collateral Manager of the Borrower.

As of 23 March 2017, the transaction portfolio consists of EUR 99.5 million of collateral obligations extended to 34 issuers. The Borrower will continue to draw on the Facilities based on a predetermined schedule as trades settle. Upon each drawing request, the Collateral Manager will ensure that certain tests are in compliance on an asset-traded balance. As the trades settle in the warehouse portfolio, under the drawing schedule, Barclays Bank PLC (Barclays; rated A (high) with a Negative trend by DBRS; the Senior and Mezzanine Lender) will continue to fund the Facilities upon the Borrower’s request. In its analysis, DBRS has considered Barclays’ 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 Collateralised Loan Obligation (CLO) Closing Date, the Optional Early Redemption Date, the Mandatory Early Redemption Date or June 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 consents of the Senior and Mezzanine Lender, there could potentially be deficiency in the payment of ultimate principal if such options are exercised prior to the maturity of the warehouse. DBRS will continue to monitor the transaction.

The Bank of New York Mellon – London Branch (rated AA with a Stable trend by DBRS) 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,” 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 CLOs in December 2016 in London. The objective of the operational review was to assess the adequacy of Alcentra’s infrastructure and internal processes used to support investment decisions and portfolio monitoring. DBRS considers the origination and servicing practices of Alcentra to be consistent with current market practices as a whole.

At closing, DBRS analysed two different covenant matrices. Depending on the total size of equity, the total notional of the warehouse will either reach EUR 320 million or EUR 400 million. The Collateral Quality Tests are different for each of the structures, and concentration limits are based on the target CLO transaction amount of EUR 400 million.

For the EUR 320 million structure, the first drawing point in a post-pricing scenario is expected to have total capitalisation of EUR 170 million, which constitutes an SFF size of EUR 119 million, an MFF size of EUR 11 million and equity of EUR 40 million. In pre-pricing scenarios, as the equity size gradually increases to EUR 40 million from EUR 5 million, the MFF size can be increased or reduced to provide credit enhancement to the SFF. In post-pricing scenarios, both the SFF and the MFF 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 recovery rate, weighted-average (WA) spread and WA coupon, also change. The maximum notional of the warehouse in the post-pricing scenario would be EUR 320 million, which constitutes an SFF size of EUR 244.5 million, an MFF size of EUR 35.5 million and equity of EUR 40 million.

For the EUR 400 million structure, 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 154 million, an MFF size of EUR 6 million and equity of EUR 50 million. In pre-pricing scenarios, as the equity size gradually increases to EUR 50 million from EUR 5 million, the MFF size can be increased or reduced to provide credit enhancement to the SFF. In post-pricing scenarios, both the SFF and the MFF 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 recovery rate, WA spread and WA coupon, also change. The maximum notional of the warehouse in the post-pricing scenario would be EUR 400 million, which constitutes an SFF size of EUR 308 million, an MFF size of EUR 42 million and equity of EUR 50 million.

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 will either use (1) its own publicly available rating of each obligor; (2) if such ratings are not available, the publicly available obligor ratings from other nationally recognized statistical rating organisations; or (3) if no public ratings are available, then the Collateral Manager is obligated to 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 factors and the following analytical considerations:

-- The transaction structure, form and sufficiency of available credit enhancement and portfolio characteristics. Most of the portfolio profile tests are set at a 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 are payable quarterly.
-- The soundness of the legal structure and 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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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.

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 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 newly issued financial instrument.

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):

Drawdown Structure of total EUR 320 million warehouse:
(1) For the first point in the matrix, in a post-pricing scenario warehouse notional is expected to be EUR 170 million.
-- An increase in Risk Score by 15% will have no impact on the SFF and MFF ratings
-- An increase in Risk Score by 30% will have no impact on the MFF rating, whereas it would lead to a downgrade of SFF to BBB (high).

(2) For the last point in the matrix, in a post-pricing scenario warehouse notional is expected to be EUR 320 million.
-- An increase in Risk Score by 15% will lead to a downgrade of SFF to A (low) and a downgrade of MFF to BB (high).
-- An increase in Risk Score by 30% will lead to a downgrade of SFF to BBB (high) and a downgrade of MFF to BB (low).

Drawdown Structure of total EUR 400 million warehouse:
(1) For the first point in the matrix, in a post-pricing scenario warehouse notional is expected to be EUR 210 million.
-- An increase in Risk Score by 15% will have no impact on the MFF rating, whereas it would lead to a downgrade of SFF to A (low).
-- An increase in Risk Score by 30% will have no impact on the MFF rating, whereas it would lead to a downgrade of SFF to BBB (high).

(2) For the last point in the matrix, in a post-pricing scenario warehouse notional is expected to be EUR 400 million.
-- An increase in Risk Score by 15% will lead to a downgrade of MFF to BB (high) and no impact on the SFF.
-- An increase in Risk Score by 30% will lead to a downgrade of SFF to BBB (high) and a downgrade of MFF to BB.

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.

Lead Analyst: Leila Manii
Rating Committee Chair: Jerry van Koolbergen
Initial Rating Date: 21 December 2016

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