DBRS Morningstar Confirms and Upgrades Ratings on Certain Tranches and Guarantee Linked Notes of Manitoulin USD Ltd., Muskoka 2020-2

DBRS, Inc. (DBRS Morningstar) confirmed its provisional ratings on the Tranche A Amount at AAA (sf), the Tranche B Amount at AA (sf), the Tranche C Amount at AA (sf) and upgraded the rating on the Tranche D Amount to A (high) (sf) from BBB (sf) (collectively, the Tranche Amounts) of two unexecuted, unfunded financial guarantees (the Financial Guarantees) of Manitoulin USD Ltd., Muskoka 2020-2 with respect to a portfolio of primarily U.S. and Canadian senior secured and senior unsecured loans originated or managed by the Bank of Montreal (BMO; rated AA with a Stable trend by DBRS Morningstar).

The rating confirmations and upgrade 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 also confirmed its ratings on the Muskoka Series 2020-2 Class B Guarantee Linked Notes (the Class B Notes) at AA (sf), the Muskoka Series 2020-2 Class C Guarantee Linked Notes (the Class C Notes) at AA (sf), and upgraded the Muskoka Series 2020-2 Class D Guarantee Linked Notes (the Class D Notes; together with the Class B Notes and Class C Notes, the Notes) to A (high) (sf) from BBB (sf). The Notes were issued by Manitoulin USD Limited (Manitoulin) referencing the executed Junior Loan Portfolio Financial Guarantee (the Junior Financial Guarantee) dated July 28, 2020, 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 rating confirmations and upgrade on the Notes reflect the timely payment of interest and ultimate payment of principal on or before the Scheduled Termination Date (as defined in the Junior Financial Guarantee referenced above). 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 referenced above).

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 that are used in assigning a rating to a facility sufficient to assess portfolio credit quality.

The ratings reflect the following:
(1) The Junior Financial Guarantee dated July 28, 2020.
(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 DBRS Morningstar’s additional adjustment for select industries related to the Coronavirus Disease (COVID-19), please see its May 18, 2020, commentary, “CLO Risk Exposure to the Coronavirus Disease (COVID-19)” at https://www.dbrsmorningstar.com/research/361112.

There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
The principal methodologies are Rating CLOs and CDOs of Large Corporate Credit (January 26, 2022) and Mapping Financial Institution Internal Ratings to DBRS Morningstar Ratings for Global Structured Credit Transactions (February 24, 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.

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 ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. 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 ratings 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” (January 26, 2022) 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 Morningstar’s “Mapping Financial Institution Internal Ratings to DBRS Morningstar Ratings for Global Structured Credit Transactions” (February 24, 2022) methodology.

The last rating action on this transaction took place on August 5, 2021.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

Lead Analyst: Quan Yoon, CFA, Vice President, U.S. Structured Credit
Rating Committee Chair: Glen Leppert Senior Vice President, US Structured Credit
Initial Rating Date: July 24, 2020

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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Rating CLOs and CDOs of Large Corporate Credit and DBRS Morningstar CLO Asset Model Version 2.2.3.1 (January 26, 2022)
https://www.dbrsmorningstar.com/research/391226

Mapping Financial Institution Internal Ratings to DBRS Morningstar Ratings for Global Structured Credit Transactions (February 24, 2022)
https://www.dbrsmorningstar.com/research/392873

Cash Flow Assumptions for Corporate Credit Securitizations (January 26, 2022)
https://www.dbrsmorningstar.com/research/391225

Interest Rate Stresses for U.S. Structured Finance Transactions (June 10, 2021)
https://www.dbrsmorningstar.com/research/379958

Legal Criteria for U.S. Structured Finance (December 15, 2021)
https://www.dbrsmorningstar.com/research/389789

Operational Risk Assessment for Collateralized Loan Obligation (CLO) and Collateralized Debt Obligation (CDO) Managers of Large Corporate Credits (September 20, 2021)
https://www.dbrsmorningstar.com/research/384628