DBRS Assigns Ratings to Direct Lending Warehouse Funding Notes of Be-Spoke Loan Funding DAC

DBRS Ratings Limited (DBRS) assigned final ratings to the Senior and Mezzanine notes of Be-Spoke Loan Funding DAC (the Borrower) as follows:

-- Senior Notes rated AA (low) (sf)
-- Mezzanine Notes rated BB (sf)

The rating on the Senior Notes addresses the timely payment of interest and the ultimate payment of principal payable on or before the Scheduled Maturity Date in September 2025. The rating on the Mezzanine Notes addresses the ultimate payment of interest and the ultimate payment of principal payable on or before the Scheduled Maturity Date in September 2025.

The Borrower is a designated activity company incorporated under the laws of the Republic of Ireland (Ireland). The transaction is a direct lending warehouse facility set up as a cash flow securitisation with the purpose to fund the purchase of a portfolio of loans granted by Bespoke Capital (Ireland) Limited (the Originator) to Spanish SMEs.

As of 29 September 2017, the transaction portfolio consisted of collateral obligations totalling EUR 70.8 million that are extended to 21 companies based in Spain. The Borrower will continue to purchase new assets originated by the Originator subject to satisfactions of the Collateral Quality Tests and Concentration Limits. The maximum advance rate for each of the Senior and the Mezzanine notes are determined based on the Collateral Quality Tests in accordance with the DBRS Test Matrix. The Royal Bank of Scotland plc will subscribe the Senior and Mezzanine notes and have veto rights over the inclusion of new assets in the portfolio.

The warehouse has a 12-month investment period followed by an amortisation period. The warehouse will reach its maturity date at the earlier of the collateralized loan obligation (CLO) closing date, a liquidation date or September 2025. Mandatory Early Redemption can be caused by an event of default (EOD), which is continuing. Additionally, Optional Early Redemption can be initiated 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 a deficiency in the payment of the ultimate principal if such options were exercised prior to the maturity of the warehouse. DBRS will continue to monitor the transaction.

The DBRS Test Matrix defines the different combinations of the Collateral Quality Tests and advanced rates for the Senior and Mezzanine notes that must be satisfied in order for additional assets to be included in the portfolio. The concentration limits are based on the target securitisation amount of EUR 400 million. Single obligor concentration is limited to 2.5% of the target securitisation amount while the DBRS single industry concentration is limited to 10%, although there are some exceptions to theses limits. According to the eligibility criteria, only senior secured or senior unsecured loans to Spanish companies with a turnover of at least EUR 7.5 million are eligible. Also at the point of origination, each loan needs to have a DBRS Risk Score or DBRS rating equivalent to B (low) or higher.

The transaction contains separate interest and principal priority of payments. Any defaults under the portfolio’s underlying loans will be written on the principal deficiency ledgers (PDLs), which can be cured at various stages in the interest priority of payments. The transaction benefits from a significant amount of excess spread that is diverted (if certain portfolio performance triggers are breached) to pay principal on the notes, sequentially.

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. Breakeven 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 (1) its own publicly available ratings of each obligor; (2) publicly available obligor ratings from other nationally recognised statistical rating organisations when DBRS ratings are not available; and (3) a credit estimate if no public ratings are available. 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 400 million at all times. 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 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 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 cashflow analysis were both conducted. Due to the inclusion of an investment 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 the arranger: Natwest Markets and the Originator: Bespoke Capital (Ireland) Limited.

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 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 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:
For the first drawing point in a post-pricing scenario, warehouse notional is expected to be EUR 71 million.
--An increase in the Risk Score by 15% would lead to the downgrade of the Senior Notes to A (high) (sf) and will have no impact on the Mezzanine Notes.
-- An increase in Risk Score by 30% would lead to a downgrade of the Senior Notes to BBB (high) (sf) and will have no impact on the Mezzanine Notes.

For the last drawing point in a post-pricing scenario, warehouse notional is expected to be EUR 400 million.
--An increase in the Risk Score by 15% would lead to the downgrade of the Senior Notes to A (high) (sf) and a downgrade of the Mezzanine Notes to BB (low) (sf).
-- An increase in Risk Score by 30% would lead to a downgrade of the Senior Notes to BBB (sf) and a downgrade of the Mezzanine Notes to B (low) (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: 29 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.