DBRS Morningstar Assigns Provisional Ratings to Certain Tranche Amounts of Kawartha CAD Ltd., Boreal 2022-1

DBRS, Inc. (DBRS Morningstar) assigned the following provisional ratings to the Tranche A Amount, Tranche B Amount, Tranche C Amount, Tranche D Amount, and Tranche E Amount (collectively, the Tranche Amounts) of two unexecuted, unfunded financial guarantees (the Financial Guarantees) of Kawartha CAD Ltd., Boreal 2022-1 with respect to a portfolio of Canadian commercial real estate (CRE) secured loans originated or managed by the Bank of Montreal (BMO; rated AA with a Stable trend by DBRS Morningstar):

-- Tranche A Amount at AAA (sf)
-- Tranche B Amount at AA (low) (sf)
-- Tranche C Amount at A (sf)
-- Tranche D Amount at BBB (low) (sf)
-- Tranche E Amount at BB (sf)

The provisional ratings on the Tranche Amounts address the likelihood of a reduction to the respective tranche notional amounts resulting from obligor defaults within the guaranteed portfolio during the period from the Effective Date until the Scheduled Termination Date. For obligors within the guaranteed portfolio, default events are limited to payment default, insolvency, and restructuring events.

The ratings take into consideration only the creditworthiness of the reference portfolio. The ratings do not address counterparty risk nor the likelihood of any event of default or termination events under the agreement occurring. BMO bought protection under a similar executed financial guarantee for certain issued notes but has not executed contracts related to the tranche notional amounts.

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.

To assess portfolio credit quality, DBRS Morningstar may provide a credit estimate, internal assessment, or ratings mapping of BMO’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 that is used in assigning a rating to a facility sufficient to assess portfolio credit quality.

The ratings reflect the following:

(1) The draft Financial Guarantees.
(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.

With regard to the Coronavirus Disease (COVID-19) pandemic, the magnitude and extent of performance stress posed to global structured finance transactions remain highly uncertain. This considers the fiscal and monetary policy measures and statutory law changes that have already been implemented or will be implemented to soften the impact of the crisis on global economies. Some regions, jurisdictions, and asset classes are, however, affected more immediately. Accordingly, DBRS Morningstar may apply additional short-term stresses to its rating analysis by, for example, front-loading default expectations and/or assessing the liquidity position of a structured finance transaction with more stressful operational risk and/or cash flow timing considerations.

For more information regarding rating methodologies and the coronavirus pandemic, please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/384482.

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 Canadian dollars unless otherwise noted.

The principal methodologies are the North American CMBS Multi-Borrower Rating Methodology (March 26, 2021), Rating CLOs and CDOs of Large Corporate Credit (January 26, 2022), and Cash Flow Assumptions for Corporate Credit Securitizations (January 26, 2022), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

DBRS Morningstar materially deviated from its principal methodologies when determining the ratings assigned to the Tranche Amounts. The loss given default (LGD) assumptions for the CRE Builder Developer portion of the guaranteed portfolio were derived via BMO’s historical realized LGDs, rather than as part of any primary or related methodologies. The material deviation is warranted given that no primary or related methodology governs the application of LGD assumptions for CRE Builder Developer loans.

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.

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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