DBRS Assigns Provisional Ratings to Cadogan Square CLO X D.A.C.

DBRS Ratings Limited (DBRS) assigned the following provisional ratings to the Senior Funding Facility (SFF) and the Senior Mezzanine Funding Facility (SMFF; together, the Facilities) of Cadogan Square CLO X D.A.C. (the Borrower):

-- SFF rated A (sf)
-- SMFF rated BBB (high) (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 August 2030. The rating on the SMFF addresses the ultimate payment of interest and the ultimate payment of principal payable on or before the Warehouse Maturity Date in August 2030. These provisional ratings shall only be finalised once the aggregate principal balance of the assets (based on committed trades) in the warehouse has reached EUR 50 million (as per Clause 6.3 (d) of the Warehouse Deed), and all collateral quality and portfolio profile tests are in compliance. The warehouse documents were executed on 6 September 2017.

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, which will be collateralised by a portfolio of leveraged loans and high-yield bonds subject to Collateral Quality and Portfolio Profile Tests. Credit Suisse Asset Management Limited (CSAM) will act as the Borrower’s Collateral Manager.

As of 7 September 2017, the transaction portfolio consisted of no collateral obligations and the Borrower will start to draw on the Facilities based on a predetermined schedule as trades settle. Upon each drawing request, the CM 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; Senior and Senior Mezzanine Lender; rated “A” with a Stable trend by DBRS) will continue to fund the Facilities upon the Borrower’s request. In its analysis, DBRS has considered the Senior and Senior 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 earlier of the CLO Closing Date, the Optional Early Redemption Date, Mandatory Early Redemption Date or September 2030. Mandatory Early Redemption can be caused by an event of default (EOD) that is continuing 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 Senior 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.

The Bank of New York Mellon - London Branch (rated AA with a Stable trend by DBRS) will act as the Account Bank and the CM will operate the Bank 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 CM’s operations for collateralised loan obligations (CLOs) in June 2016 in London. The objective of the operational review was to assess the adequacy of CSAM’s infrastructure and internal processes used to support investment decisions and portfolio monitoring. DBRS considers the origination and servicing practices of CSAM to be consistent with current market practices as a whole.

DBRS has analysed two different covenant matrices, as the CM can either opt for a euro-only structure or opt for a structure that contains up to 23 million euro-equivalent of GBP-denominated assets. The Collateral Quality Tests are different for each of the structures and concentration limits are based on the target CLO transaction amount of EUR 460 million.

For both structures, 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 117 million, an SMFF size of EUR 13 million and a remainder of EUR 40 million in equity. In pre-pricing scenarios, as the equity size gradually increases to EUR 40 million from EUR 5 million, the SMFF size can be increased or reduced to provide credit enhancement to the SFF. In post-pricing scenarios, both the SFF and 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 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 460 million, which constitutes an SFF size of EUR 350.5 million, an SMFF size of EUR 69.5 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 nationally recognised statistical rating organisations; and (3) if no public ratings are available, then the CM 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, 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 of EUR 460 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, the presence of legal opinions that address the true sale of the assets to the Borrower, the non-consolidation of the Borrower and 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 to the rating 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.

An asset and a cash flow analysis were both conducted. Due to the inclusion of a reinvestment period in the transaction, the analysis is based on the worst-case replenishment criteria set forth in the transaction legal documents.

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 data and information used for this rating include Borrower, the CM and the Senior and Senior Mezzanine Lender.

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

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

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

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

This rating concerns newly 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 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):

Euro-Only Drawdown Structure:
(1) For the first drawing point in a post-pricing scenario, warehouse notional is expected to be EUR 170 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 drawing point in a post-pricing scenario, warehouse notional is expected to be EUR 460 million.
-- An increase in the Risk Score by 15% will have no impact on the current rating of the SFF, whereas it would lead to a downgrade of the SMFF to BBB (sf).
-- An increase in the Risk Score by 30% will have no impact on the current rating of the SFF, whereas it would lead to a downgrade of the SMFF to BB (high) (sf).

Drawdown Structure where GBP Assets can be Purchased:
(1) For the first drawing point in a post-pricing scenario, warehouse notional is expected to be EUR 170 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% would lead to a downgrade of the SFF to A (low) (sf) and a downgrade of the SMFF to BBB (sf).

(2) For the last drawing point in a post-pricing scenario, warehouse notional is expected to be EUR 460 million.
-- An increase in the Risk Score by 15% will have no impact on the current rating of the SFF, whereas it would lead to a downgrade of the SMFF to BB (high) (sf).
-- An increase in the Risk Score by 30% will have no impact on the current rating of the SFF, whereas it would lead to a downgrade of the SMFF to BB (high) (sf).

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 and US regulations only.

Lead Analyst: Mudasar Chaudhry, Vice President
Rating Committee Chair: Jerry van Koolbergen, Managing Director
Initial Rating Date: 07 September 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

-- 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.