DBRS Finalises Provisional Ratings on BlueMountain Fuji EUR CLO III D.A.C.

DBRS Ratings Limited (DBRS) finalised the provisional ratings previously assigned to the Senior Funding Facility (SFF) and the Mezzanine Funding Facility (MFF; together, the Facilities) of BlueMountain Fuji EUR CLO III D.A.C. (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 Scheduled 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 Scheduled Maturity Date in June 2031. DBRS finalised the provisional ratings previously assigned as the aggregate principal balance of the assets (based on committed trades) in the warehouse has reached EUR 50 million (as per Clause 2.5 (d) of the Warehouse Agreement), and all collateral quality and portfolio profile tests are in compliance.

The warehouse documents were executed on 26 September 2017, and the Warehouse Agreement was amended on 13 December 2017, changing the Collateral Quality Tests. DBRS analysed the amended structure and concluded that the implemented changes do not have an impact on the rating of the Facilities.

The Borrower is a designated activity company incorporated under the laws of the Republic of Ireland. The warehouse transaction was 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. BlueMountain Fuji Management, LLC, Series A (BlueMountain) will act as the Borrower’s Collateral Manager (CM).

As of 8 December 2017, the transaction portfolio consisted of EUR 58.0 million of collateral obligations extended to 19 issuers. The Borrower will continue 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 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 Mezzanine Lender’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 ramp-up period followed by an amortisation period. The warehouse will reach its maturity date at the earlier of the CLO Closing Date, or other date determined by the CM where final payment on the collateral is received by the Borrower or June 2031.

Under the Warehouse Agreement, upon the occurrence and during the continuance of an Event of Default (EOD), the Collateral Agent may be directed by Instructing Investor (as defined in the Warehouse Agreement referred to above) to sell or otherwise dispose of the Collateral as a remedy, which could disadvantage the Mezzanine Funding Facility. One of these Events of Default is the Market Value (MV) Ratio being less than or equal to 110.0% (the Unsubordinated MV Coverage Event of Default). If left uncured for five Business Days, the Instructing Investors may be able to liquidate the transaction while the Mezzanine Funding Facility is still performing, and the Mezzanine Funding Facility will not be able to block such liquidation or be required to be taken out in full as a test for such liquidation. Thus, the ratings assigned on the Mezzanine Funding Facility are subject to additional downgrade risk and/or default for non-payment.

Additionally, an early maturity date can be caused by a Mandatory Early Redemption Date, an Optional Early Maturity Date (no earlier than 12 months after the reinvestment period end date) or at the sole option of the Instructing Lender (Barclays) following an EOD. Under the Warehouse Agreement, upon an occurrence of (and during the continuation of) an EOD, the Instructing Investor (Barclays) may, in its sole option, elect to liquidate the portfolio, which could adversely affect the Mezzanine Lenders and potentially affect ratings’ volatility on the Mezzanine Funding Facility.

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 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 2017 in London. The objective of the operational review was to assess the adequacy of BlueMountain’s infrastructure and internal processes used to support investment decisions and portfolio monitoring. DBRS considers the origination and servicing practices of BlueMountain 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 153 million, an MFF size of EUR 17 million and the remaining EUR 40 million in equity. 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 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 305 million, an MFF size of EUR 55 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 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, 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 ratings 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.

DBRS has conducted a review of the transaction’s legal document provided in the context of the aforementioned amendments. A review of any other transaction’s legal documents was not conducted as the documents have remained unchanged since the most recent rating action.

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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.

The sources of data and information used for these ratings include the Borrower, the CM and the Senior and 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 these ratings 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.

The lead analyst responsibilities for this transaction have been transferred to Joana Seara da Costa.

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 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 and US regulations only.

Lead Analyst: Joana Seara da Costa, Senior Financial Analyst
Rating Committee Chair: Jerry van Koolbergen, Managing Director
Initial Rating Date: 28 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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.