DBRS Morningstar Confirms Rating of Class A-1 Notes Issued by Ares XLVI CLO Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed its rating of AAA (sf) on the Class A-1 Notes issued by Ares XLVI CLO Ltd.

The rating on the Class A-1 Notes (the Notes) was issued pursuant to the Indenture, dated as of January 12, 2018, between Ares XLVI CLO Ltd. as Issuer and U.S. Bank National Association (rated AA (high) with a Stable trend by DBRS Morningstar), as Trustee.

The rating on the Notes addresses the timely payment of interest and the ultimate payment of principal in accordance with the terms of the Indenture referred to above.

The Notes issued by the Issuer are collateralized primarily by a portfolio of U.S. senior secured floating-rate broadly syndicated corporate loans. The collateralized loan obligation (CLO) is managed by Ares CLO Management, LLC (Ares), an affiliate of Ares Management Corporation, as Asset Manager. DBRS Morningstar considers Ares to be an acceptable CLO manager.

The rating on the Notes was confirmed pursuant to the application of DBRS Morningstar’s “Rating CLOs and CDOs of Large Corporate Credit,” “Cash Flow Assumptions for Corporate Credit Securitizations,” and “Operational Risk Assessment for Collateralized Loan Obligation (CLO) and Collateralized Debt Obligation (CDO) Managers of Large Corporate Credits” methodologies (collectively, the DBRS Morningstar CLO Methodologies). Hereafter, DBRS Morningstar will monitor the rating in accordance with the DBRS Morningstar CLO Methodologies.

Accordingly, the above DBRS Morningstar rating reflects the following primary considerations:

(1) DBRS Morningstar’s application of its DBRS Morningstar CLO Methodologies, which set forth key analytical considerations and applicable analytics used when DBRS Morningstar assigns and monitors credit ratings.
(a) DBRS Morningstar uses a predictive model (the publicly available CLO Asset Model) to determine a ratings-based pool default-rate (the Stressed Default Rate) and that can be equated with a certain credit rating. Based on inputs into the predictive model, such as obligor credit quality, obligor and industry diversification, and term to maturity, the predictive model then generates a level of cumulative default stress appropriate for each rating category.
(b) DBRS Morningstar then performs cash flow analysis using a proprietary cash flow engine, which incorporates inputs such as the Stressed Default Rate, as well as assumptions relating to principal amortization, amount of interest generated, default timing, recoveries, and movement in interest rate curves, among other considerations. The output of this cash flow analysis is referred to as the break-even default rate (BDR).
(c) DBRS Morningstar assigns ratings based on a comparison of the BDR results of the cash flow analysis as it compares to the Stressed Default Rate output from the default probability model.

(2) DBRS Morningstar notes that a legal analysis, which included but was not limited to legal opinions and various transaction documents, was performed by Morningstar Credit Ratings, who also engaged external counsel as part of its process of assigning new ratings to the CLOs on or prior to the closing date. DBRS Morningstar did not perform additional legal analysis for purpose of assigning or monitoring ratings to the Notes, unless otherwise indicated in this press release.

(3) The Indenture, dated as of January 12, 2018, as amended from time to time.

(4) The integrity of the transaction structure.

(5) DBRS Morningstar’s assessment of the portfolio quality.

(6) Adequate credit enhancement to withstand projected collateral loss rates under various cash flow stress scenarios.

(7) DBRS Morningstar’s assessment of the origination, servicing, and CLO management capabilities of Ares as CLO Asset Manager.

(8) DBRS Morningstar reviewed key transaction performance indicators reported in periodic remittance reports since the closing date.

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 can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is Rating CLOs and CDOs of Large Corporate Credit (February 8, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

The DBRS Morningstar Sovereigns group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts with the baseline scenarios set forth in the following report:
https://www.dbrsmorningstar.com/research/384150.

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.

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

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