Morningstar DBRS Removes the Under Review with Developing Implications and Upgrades Ratings on the Term Loan and the Subordinated Loan of CBAM CLO Management LLC 2017-4

DBRS, Inc. (Morningstar DBRS) removed the Under Review with Developing Implications and upgraded ratings on the Term Loan to A from BBB (high) and on the Subordinated Loan to BBB (high) from BBB (low) (together, the Loans) issued by CBAM CLO Management LLC, pursuant to the Loan and Security Agreement (LSA), dated as of December 6, 2017, as amended by Amendment No. 1 to the LSA (the Amendment), dated as of December 4, 2020, among CBAM CLO Management LLC, as Borrower, Security Benefit Life Insurance Company, as Lender, and Cortland Capital Market Services LLC, as Agent.

Morningstar DBRS’ rating on the Term Loan addresses the ultimate payment of the Term Loan Interest Rate (excluding the Post-Default Rate) and Term Loan Deferred Interest and the ultimate payment of principal on or before the Maturity Date (all capitalized terms, as defined in the LSA). Morningstar DBRS’ rating on the Subordinated Loan addresses the ultimate payment of the Subordinated Loan Interest Amounts (excluding the Post-Default Rate) and Subordinated Loan Deferred Interest and the ultimate payment of principal on or before the Maturity Date (all capitalized terms, as defined in the LSA).

RATING RATIONALE
The rating action is a result of Morningstar DBRS’ review of the transaction performance by applying the “Global Methodology for Rating CLOs and Corporate CDOs” (the CLO Methodology), released on October 22, 2023. On October 30, 2023, the credit ratings were placed Under Review with Developing Implications to allow for Morningstar DBRS to review the credit ratings using the CLO Methodology. The transaction’s Stated Maturity is January 15, 2031. The Reinvestment Period ended on January 15, 2023.

The rationale for Morningstar DBRS’ ratings upgrades on the Term Loans and the Subordinated Loans is that the static-pool analysis produced significantly lower expected losses, given the greater certainty on the underlying pool of assets. Given a static pool, Morningstar DBRS analyzed the actual obligations in the pool as opposed to a hypothetical pool, which is governed by the covenanted test limitations. The actual pool analysis produced better than expected loss results, which warranted the upgrades. In addition, some deleveraging has occurred in the transaction in the past year, which improved overcollateralization ratios and provided stronger cushion levels.

The Borrower is a special-purpose vehicle that was formed to hold the Financed Retention Securities and be the Portfolio Manager of CBAM 2017-4, Ltd. (the CLO Issuer). The Term Loan and the Subordinated Loan of the Borrower are collateralized by the Financed Retention Securities of the CLO Issuer. The Financed Retention Securities consist of (a) the principal amount of (i) $32,000,000 of the Class A Notes, (ii) $2,723,684 of the Class B-1 Notes, (iii) $3,026,316 of the Class B-2 Notes, (iv) $2,750,000 of the Class C Notes, and (v) $3,250,000 of the Class D Notes, as such terms are defined in the CLO Indenture, and (b) any CLO Notes received, or loans made to the CLO Issuer by the Borrower under a refinancing facility, in connection a Refinancing or a Re-Pricing of any Financed Retention Securities. The $500,000 Class X Notes were repaid in whole prior to the Amendment Date.

As of January 23, 2024, certain key parties to the transaction are Related Parties (as defined in the LSA). The collateral securing the Term Loan and the Subordinated Loan, the Financed Retention Securities of CBAM 2017-4, Ltd., consists of securities that were issued in connection with the collateralized loan obligation (CLO) transaction CBAM 2017-4, Ltd., where the sponsor of the transaction is CBAM Partners, LLC, now acquired by the Carlyle Group (Carlyle).

In its analysis, Morningstar DBRS considered the following aspects of the transaction:
(1) The transaction’s capital structure and the form and sufficiency of available credit enhancement.
(2) Relevant credit enhancement in the form of subordination and excess spread.
(3) The ability of the Loans to withstand projected collateral loss rates under various cash flow stress scenarios.
(4) The credit quality of the underlying collateral.
(5) Morningstar DBRS’ assessment of the origination, servicing, and CLO management capabilities of Carlyle as the
Collateral Manager.

Some particular strengths of the transaction are (1) collateral quality that consists of at least 90% senior-secured floating-rate broadly syndicated loans and (2) the strong diversification of underlying obligations. Some challenges were identified as follows: (1) the underlying collateral portfolio may be insufficient to redeem the Loans in an Event of Default.
To account for the static pool, Morningstar DBRS analyzed the actual obligations in the pool as reported in the trustee report on January 2, 2024, which took into account the failing WAL Test, the Rating Factor Test, the Weighted Average Spread Test, as well the CCC concentration limit. The Coverage Tests that Morningstar DBRS modeled in its analysis are presented below:

Coverage Tests:
Class A/B OC Ratio: Threshold 122.50%; Current 129.75%
Class C OC Ratio: Threshold 115.50%; Current 120.31%
Class D OC Ratio: Threshold 108.30%; Current 110.79%
Class E OC Ratio: Threshold 103.70%; Current 105.04%

Class A/B IC Ratio: Threshold 120.00%; Current 139.22%
Class C IC Ratio: Threshold 115.00%; Current 128.41%
Class D IC Ratio: Threshold 110.00%; Current 116.49%

Collateral Quality Tests:
Maximum Weighted Average Life Test: Threshold 3.14 years; Current 3.71 years
Minimum Floating Spread Test: Threshold 3.54%; Current 3.53%
Maximum Rating Factor Test: Threshold 2970; Current 2971
Maximum Diversity Score: Threshold 79; Current 79

As of January 2, 2024, the transaction is failing three CQT tests: the Maximum Rating Factor Test; the Minimum Floating Spread Test; the Weighted Average Life Test; and one concentration limitation test for the maximum allocation toward CCC obligations. The failures of this nature are expected to be observed in static transactions being well into the amortization period. Morningstar DBRS analyzed each loan in the pool separately by inputting its rating, seniority, country of origin, and industry among a few into the Morningstar DBRS CLO Insight Model. There were approximately $4.8 million in defaulted assets.

Morningstar DBRS analyzed the transaction using the Morningstar DBRS CLO Insight Model and its proprietary cash flow engine, which incorporated assumptions regarding principal amortization, amount of interest generated, principal prepayments, default timings, and recovery rates, among other credit considerations referenced in the Morningstar DBRS “Global Methodology for Rating CLOs and Corporate CDOs” (October 22, 2023; https://www.dbrsmorningstar.com/research/422269).

The transaction is performing according to the contractual requirements of the LSA. Model-based analysis, which had incorporated the above-mentioned failures, produced satisfactory results. Considering the transaction performance, its legal aspects and structure, Morningstar DBRS upgraded its ratings on the Loans issued by CBAM CLO Management LLC.

The transaction assumptions consider Morningstar DBRS’ baseline macroeconomic scenarios for rated sovereign economies, available in its commentary “Baseline Macroeconomic Scenarios for Rated Sovereigns: December 2023 Update,” published on December 19, 2023 (https://www.dbrsmorningstar.com/research/425506). These baseline macroeconomic scenarios replace Morningstar DBRS’ moderate and adverse pandemic scenarios, which were first published in April 2020.

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

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/416784 (July 4, 2023).

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

The principal methodology applicable to the credit ratings is the Global Methodology for Rating CLOs and Corporate CDOs and the Morningstar DBRS CLO Insight Model (v.1.0.0.0) (October 22, 2023)
(https://www.dbrsmorningstar.com/research/422269).

Other methodologies referenced in this transaction are listed at the end of this press release.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

DBRS, Inc.
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The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Operational Risk Assessment for Collateralized Loan Obligations (CLOs) and Corporate Collateralized Debt Obligations (CDOs) (September 14, 2023),
https://www.dbrsmorningstar.com/research/420608)
-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023),
https://www.dbrsmorningstar.com/research/415687
-- Legal Criteria for U.S. Structured Finance (December 7, 2023),
https://www.dbrsmorningstar.com/research/425081/legal-criteria-for-us-structured-finance

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