DBRS Morningstar Confirms Ratings on the Tranche Amounts and Muskoka Series 2018-1 Notes Issued by Manitoulin USD Limited

DBRS, Inc. (DBRS Morningstar) confirmed its provisional ratings on the Tranche A Amount, Tranche B Amount, and Tranche C Amount (collectively, the Tranche Amounts) at AAA (sf), AA (sf), and A (sf), respectively, 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 confirmed its ratings on the Muskoka Series 2018-1 Class B Guarantee Linked Notes (the Class B Notes), the Muskoka Series 2018-1 Class C Guarantee Linked Notes (the Class C Notes), 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) at AA (sf), A (sf), and BB (high) (sf), respectively. The Notes were issued by Manitoulin 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).

RATING RATIONALE

The rating rationale took into consideration the end of the Replenishment Period with no additional reinvestment of collateral permitted after such date. The latter increased the certainty of the CLO portfolio composition, resulting in lower loss expectations. In its analysis, DBRS Morningstar has also considered a material reduction in the number of underlying obligors. Approximately 23% of the collateral has been paid down since September 8, 2021. There have been three defaulted obligations since the initial rating assignment in 2018, which make up approximately 2.89% of the Initial Portfolio Amount. Despite the reduction in the number of obligors, the diversification remains adequate across 28 industries. DBRS Morningstar noted some concentration in the B (low) and B rating levels among obligors. The DBRS Morningstar Risk Factor is 17.6% as of September 2, 2022. The rating confirmation on the Tranche Amounts and the Notes reflects the current transaction performance being within DBRS Morningstar’s expectation.

In addition, the confirmation of the above ratings reflects the following primary considerations:

(1) The Financial Guarantee dated as of September 27, 2018.
(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 under various cash flow stress scenarios.
(5) DBRS Morningstar’s assessment of the origination capabilities of the Bank of Montreal.

Model based analysis produced satisfactory results which supported the confirmation of the ratings on the Tranche Amounts and the Notes.

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.

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/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. (May 17, 2022)

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/402907.

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 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 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” (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 October 8, 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: 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
Tel. +1 212 806-3277

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

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

-- Operational Risk Assessment for Collateralized Loan Obligation (CLO) and Collateralized Debt Obligation (CDO) Managers of Large Corporate Credits (September 23, 2022),
https://www.dbrsmorningstar.com/research/384628

-- Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022),
https://www.dbrsmorningstar.com/research/402153

-- Legal Criteria for U.S. Structured Finance (June 15, 2022),
https://www.dbrsmorningstar.com/research/398418

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