DBRS Morningstar Confirms and Upgrades Certain Tranches and Notes of Manitoulin USD Ltd., Muskoka 2019-1

DBRS, Inc. (DBRS Morningstar) confirmed its provisional rating on the Tranche A Amount at AAA (sf) and upgraded its provisional ratings on the Tranche B Amount to A (high) (sf) from A (sf) and the Tranche C Amount to BBB (sf) from BBB (low) (sf) (collectively, the Tranche Amounts) of two unexecuted, unfunded financial guarantees (the Financial Guarantees) with respect to a portfolio of primarily U.S. and Canadian senior secured or senior unsecured loans originated or managed by Bank of Montreal (BMO; rated AA with a Stable trend by DBRS Morningstar) and issued by Manitoulin USD Ltd., Muskoka 2019-1(Manitoulin).

The provisional ratings on the Tranche Amounts address the likelihood of a reduction to the respective Tranche Amounts caused by a Tranche Loss Balance on each respective tranche, resulting from defaults and losses within the guaranteed portfolio during the period from the Effective Date until the Scheduled Termination Date (as defined in the Financial Guarantees).

The ratings assigned by DBRS Morningstar are expected to remain provisional until the underlying agreements are executed. BMO may have no intention of executing the Financial Guarantees. DBRS Morningstar will maintain and monitor the provisional ratings throughout the life of the transaction or while it continues to receive performance information.

DBRS Morningstar also upgraded its ratings on the Muskoka Series 2019-1 Class B Guarantee Linked Notes (the Class B Notes) to A (high) (sf) from A (sf); the Muskoka Series 2019-1 Class C Guarantee Linked Notes (the Class C Notes) to BBB (sf) from BBB (low) (sf); and the Muskoka Series 2019-1 Class D Guarantee Linked Notes (together with the Class B Notes and Class C Notes, the Notes) to BB (high) (sf) from BB (sf). The Notes were issued by Manitoulin, referencing the executed Junior Loan Portfolio Financial Guarantee (the Junior Financial Guarantee) dated as of January 30, 2019, between Manitoulin as Guarantor and BMO as Beneficiary with respect to a portfolio of primarily U.S. and Canadian senior secured and senior unsecured loans.

The ratings on the Notes address the timely payment of interest and ultimate payment of principal on or before the Scheduled Termination Date (as defined in the Junior Financial Guarantee). The payment of the interest due to the Notes is subject to the Beneficiary’s ability to pay the Guarantee Fee Amount (as defined in the Junior Financial Guarantee).

To assess portfolio credit quality for each corporate obligor in the portfolio DBRS Morningstar relies on, DBRS Morningstar ratings and public ratings from other rating agencies or DBRS Morningstar may provide a credit estimate, internal assessment, or ratings mapping of the Beneficiary’s internal ratings model. Credit estimates, internal assessments, and ratings mappings are not ratings; rather, they represent an abbreviated analysis, including model-driven or statistical components of default probability for each obligor used in assigning a rating to the facility that is sufficient to assess portfolio credit quality.

On the Effective Date, Manitoulin will utilize the proceeds of the issue of the Notes to make a deposit into the Cash Deposit Accounts with the Cash Deposit Bank. DBRS Morningstar may review the ratings on the Notes in the event of a downgrade of the Cash Deposit Bank below certain thresholds, as defined in the transaction documents.

The ratings reflect the following:
(1) The Financial Guarantees dated January 30, 2019.
(2) The integrity of the transaction structure.
(3) DBRS Morningstar’s assessment of the portfolio quality.
(4) Adequate credit enhancement to withstand projected collateral loss rates.

Notes:
The principal methodologies are Rating CLOs and CDOs of Large Corporate Credit and Mapping Financial Institution Internal Ratings to DBRS Ratings for Global Structured Credit Transactions, which can be found on dbrs.com under Methodologies & Criteria.

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

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

This rating is endorsed by DBRS Ratings Limited for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

Each of the principal asset class methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision, Specifically, for the recovery rate, DBRS Morningstar applied the senior secured and senior unsecured recovery rates defined in its “Rating CLOs and CDOs of Large Corporate Credit” methodology. DBRS Morningstar applies different recovery rates depending on the recovery tier and seniority.

DBRS Morningstar used its CLO Asset Model to determine expected default rates for the portfolio at each rating level. To determine the credit risk of each underlying reference obligation, DBRS Morningstar relied on either public ratings or a ratings mapping to DBRS Morningstar ratings of BMO’s internal ratings models. The mapping was completed in accordance with DBRS’s “Mapping Financial Institution Internal Ratings to DBRS Ratings for Global Structured Credit Transactions” methodology.

The last rating action on this transaction took place on January 30, 2019.

For further information on DBRS Morningstar 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: Arthur Krivoruk, Financial Analyst, US Structured Credit
Rating Committee Chair: Jerry van Koolbergen, Managing Director, Head of US Structured Credit
Initial Rating Date: January 24, 2019

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

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