DBRS Morningstar Downgrades and Places Ratings on Certain Tranches and Muskoka 2018-1 Notes Issued by Manitoulin USD Limited Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) downgraded its provisional ratings on the Tranche B Amount to A (high) (sf) from AA (sf) and the Tranche C Amount to BBB (sf) from A (low) (sf) and placed the ratings Under Review with Negative Implications. DBRS Morningstar’s provisional rating on the Tranche A Amount remains unchanged. Together, the Tranche A Amount, Tranche B Amount, and Tranche C Amount make up the rated 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 Limited (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).

DBRS Morningstar’s ratings 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 downgraded its ratings on the Muskoka Series 2018-1 Class B Guarantee Linked Notes (the Class B Notes) to A (high) (sf) from AA (sf), the Muskoka Series 2018-1 Class C Guarantee Linked Notes (the Class C Notes) to BBB (sf) from A (low) (sf), and the Muskoka Series 2018-1 Class D Guarantee Linked Notes (the Class D Notes; together with the Class B Notes and Class C Notes, the Notes) to BB (sf) from BB (high) (sf). DBRS Morningstar also placed the ratings Under Review with Negative Implications. Manitoulin issued the Notes referencing the executed Junior Loan Portfolio Financial Guarantee (the Junior Financial Guarantee) dated as of September 27, 2018, 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).

DBRS Morningstar took these rating actions as a result of the recent deterioration in the underlying portfolio’s credit quality. In the last few months, DBRS Morningstar observed that the portfolio’s weighted-average (WA) risk score has increased materially. DBRS Morningstar deems these actions appropriate amid the uncertainty of the Coronavirus Disease (COVID-19) pandemic and its continued impact on the underlying portfolio’s credit quality and performance.

To assess portfolio credit quality for each corporate obligor in the portfolio, DBRS Morningstar relies on its 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 to assign a rating to the facility that is sufficient to assess portfolio credit quality.

On the Effective Date, Manitoulin used the proceeds of the issuance of the Notes to make a deposit into the Cash Deposit Accounts with the Cash Deposit Bank (as defined in the Junior Financial Guarantee). DBRS Morningstar may review the ratings on the Notes if the Cash Deposit Bank is downgraded below certain thresholds as defined in the transaction documents.

As the coronavirus spread around the world, certain countries imposed quarantines and lockdowns, including the United States, which accounts for over one-quarter of confirmed cases worldwide. The coronavirus pandemic has adversely affected not only the economies of the nations most afflicted with the coronavirus, but also the overall global economy with diminished demand for goods and services as well as disrupted supply chains. This may result in deteriorated financial conditions for many companies and obligors, some of which will experience the effects of such negative economic trends more than others. At the same time, governments and central banks in multiple regions, including the United States and Europe, have taken significant measures to mitigate the economic fallout from the coronavirus pandemic.

In conjunction with DBRS Morningstar’s commentary “Global Macroeconomic Scenarios: Implications for Credit Ratings” published on April 16, 2020, and updated in its “Global Macroeconomic Scenarios: June Update” commentary on June 1, 2020, DBRS Morningstar further considers additional adjustments to assumptions for the collateralized loan obligation (CLO) asset class that consider the moderate economic scenario outlined in the commentaries. The adjustments include a higher default assumption for the WA credit quality of the current collateral obligation portfolio. To derive the higher default assumption, DBRS Morningstar notches ratings for obligors in certain industries and obligors at various rating levels based on their perceived exposure to the adverse disruptions caused by the coronavirus. Considering a higher default assumption would result in losses that exceed the original default expectations for the affected classes of notes. DBRS Morningstar may adjust the default expectations further if the duration or severity of the adverse disruptions caused by the coronavirus change.

DBRS Morningstar ran an additional higher default adjustment on the WA DBRS Morningstar Risk Score of the current collateral obligation pool with the maximum covenanted tenor, and this stressed modeling pool was run through the Monte Carlo simulation component of DBRS Morningstar’s CLO Asset Model to generate a stressed default rate. DBRS Morningstar considered the results of this additional default adjustment for the above rating actions.

For more information regarding DBRS Morningstar’s simplified set of macroeconomic scenarios for select economies related to the coronavirus, please see its April 16, 2020, commentary “Global Macroeconomic Scenarios: Implications for Credit Ratings” at https://www.dbrsmorningstar.com/research/359679; its April 22, 2020, commentary “Global Macroeconomic Scenarios: Application to Credit Ratings” at https://www.dbrsmorningstar.com/research/359903; and its June 1, 2020, updated commentary, “Global Macroeconomic Scenarios: June Update” at https://www.dbrsmorningstar.com/research/361867.

For more information regarding DBRS Morningstar’s additional adjustment for select industries related to the coronavirus, please see its May 18, 2020, commentary “CLO Risk Exposure to the Coronavirus Disease (COVID-19)” at https://www.dbrsmorningstar.com/research/361112.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodologies are Rating CLOs and CDOs of Large Corporate Credit (February 28, 2020) and Mapping Financial Institution Internal Ratings to DBRS Morningstar Ratings for Global Structured Credit Transactions (March 11, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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 (DBRS Morningstar) 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 the BMO’s internal ratings models. The mapping was completed in accordance with DBRS Morningstar’s “Mapping Financial Institution Internal Ratings to DBRS Morningstar Ratings for Global Structured Credit Transactions” methodology.

The last rating action on this transaction took place on September 26, 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: Quan Yoon, CFA, Assistant Vice President, U.S. Structured Credit
Rating Committee Chair: Jerry van Koolbergen, Managing Director, Head of U.S. Structured Credit
Initial Rating Date: September 24, 2018

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

DBRS, Inc.
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New York, NY 10005 USA
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-- Rating CLOs and CDOs of Large Corporate Credit and CLO Asset Model Version 2.2.3 (February 28, 2020)
https://www.dbrsmorningstar.com/research/357452/rating-clos-and-cdos-of-large-corporate-credit

-- Cash Flow Assumptions for Corporate Credit Securitizations (February 28, 2020)
https://www.dbrsmorningstar.com/research/357453/cash-flow-assumptions-for-corporate-credit-securitizations

-- Mapping Financial Institution Internal Ratings to DBRS Morningstar Ratings for Global Structured Credit Transactions (March 11, 2020)
https://www.dbrsmorningstar.com/research/357853/mapping-financial-institution-internal-ratings-to-dbrs-morningstar-ratings-for-global-structured-credit-transactions

-- Legal Criteria for U.S. Structured Finance (January 21, 2020)
https://www.dbrsmorningstar.com/research/355719/legal-criteria-for-us-structured-finance