Morningstar DBRS Removes the Under Review with Developing Implications Status and Confirms Provisional Ratings to Certain Tranche Amounts of Manitoulin USD Ltd., Algonquin 2023-1

DBRS, Inc. (Morningstar DBRS removes the Under Review with Developing Implications status and confirms the following provisional credit ratings on the Tranche Initial Notional Amounts of the Senior Tranche, Tranche B, Tranche C, and Tranche D (collectively, the Tranche Amounts) of Kawartha CAD Ltd. (the Issuer) pursuant to Schedule 1 of the executed Junior Loan Portfolio Financial Guarantee (the Financial Guarantee) dated October 19, 2023, between the Issuer as Guarantor and the Bank of Montreal (BMO) as Beneficiary with respect to a portfolio of primarily U.S. and Canadian senior secured and senior unsecured loans originated or managed by BMO (rated AA with a Stable trend by Morningstar DBRS):

-- Senior Tranche at AAA (sf)
-- Tranche B at AA (sf)
-- Tranche C at A (high) (sf)
-- Tranche D at A (low) (sf)

The provisional credit ratings on the Tranche Amounts address the likelihood of a reduction to the respective Tranche Initial Notional Amount (as defined in the Financial Guarantees) 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 provisional credit ratings on the Tranche Amounts take into consideration only the creditworthiness of the reference portfolio. The provisional credit ratings neither address counterparty risk nor the likelihood of any event of default or termination events under the agreement occurring. BMO bought protection under the Financial Guarantee for certain issued notes issued in respect of such Protected Tranche (as defined in the Financial Guarantee).

BMO did not request that Morningstar DBRS assign credit ratings to the Notes to be issued under the executed financial guarantee. The payment of principal and interest (the Guarantee Fee Amount, as defined in the executed financial guarantee referenced above) on the Notes is subject to additional counterparty credit risk associated with the Beneficiary’s ability to pay such amounts. As a result, if Morningstar DBRS were to rate such Notes, even if they are pari passu with a related Tranche Amount, Morningstar DBRS’ credit rating on the Notes may be different than the credit rating assigned to the related Tranche Amount.

The provisional rating confirmations 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.

Morningstar DBRS’ credit ratings on the Tranche Amounts address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are a reduction to the respective Tranche Initial Notional Amounts (as defined in the Financial Guarantee) resulting from obligor defaults within the guaranteed portfolio during the period from the Effective Date until the Scheduled Termination Date.

Morningstar DBRS’ long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

Morningstar DBRS expects its provisional credit ratings on the Tranche Amounts to remain provisional until there is an executed Financial Guarantee agreement covering the payment obligations and exchange of risk in respect of such Tranche Amounts. BMO may have no intention of executing such a Financial Guarantee. Morningstar DBRS 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, Morningstar DBRS 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.

CREDIT RATING RATIONALE/DESCRIPTION
The credit rating actions are a result of Morningstar DBRS’ review of the transaction performance and application of the “Global Methodology for Rating CLOs and Corporate CDOs” (the CLO Methodology), including the Morningstar DBRS CLO Insight Model, released on October 22, 2023. On November 9, 2023, the credit ratings were placed Under Review with Developing Implications to allow Morningstar DBRS to review the credit ratings using the CLO Methodology. The Scheduled Termination Date is November 1, 2028. The Replenishment Cut-Off Date is May 20, 2026.

(1) The Financial Guarantee of Manitoulin USD Ltd., a corporation established under the Canada Business Corporations Act. Manitoulin USD Ltd. is a synthetic risk transfer transaction with BMO as the Beneficiary.
(2) The integrity of the transaction structure and the form and sufficiency of available credit enhancement.
(3) The credit quality of the underlying collateral, subject to the Replenishment Criteria.
(4) The ability of the Tranche Amounts to withstand projected collateral loss rates under various stress scenarios.
(5) The legal structure as well as legal opinions addressing certain matters of the Issuer and the consistency with the Morningstar DBRS “Legal Criteria for U.S. Structured Finance” methodology.
(6) Morningstar DBRS’ assessment of the origination, servicing, and management capabilities of BMO.

The transaction is performing according to the parameters set in the Financial Guarantees. As of December 29, 2023, certain Replenishment Criteria were not met. Morningstar DBRS considered these failures in its analysis.

Morningstar DBRS analyzed the transaction using its CLO Insight Model, based on certain reference portfolio characteristics, including Eligibility Criteria and Replenishment Criteria, as defined per the Financial Guarantees; and tranche-specific recovery rates, among other credit considerations referenced in the Morningstar DBRS rating methodology “Global Methodology for Rating CLOs and Corporate CDOs” (October 22, 2023), https://dbrs.morningstar.com/research/422269. The initial reference portfolio consists of well-diversified senior unsecured and senior secured corporate loans across various industries and rating levels. The analysis produced satisfactory results, which supported the confirmation of the provisional ratings on the Tranche Amounts.

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://dbrs.morningstar.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)” at https://dbrs.morningstar.com/research/361112.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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://www.dbrsmorningstar.com/research/416784 (July 4, 2023).

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

The principal methodologies applicable to the credit rating are the Global Methodology for Rating CLOs and Corporate CDOs (October 22, 2023), https://dbrs.morningstar.com/research/422269 and Mapping Financial Institution Internal Ratings to Morningstar DBRS Ratings for Global Structured Credit Transactions (February 17, 2023; https://www.dbrsmorningstar.com/research/410076).

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 credit 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.

A provisional credit rating is not a final credit rating with respect to the above-mentioned Tranche Amounts and may change or be different from the final credit rating assigned or may be discontinued. The assignment of the final credit ratings on the above-mentioned Tranche Amounts are subject to receipt by DBRS Morningstar of all data and/or information and final documentation that DBRS Morningstar deems necessary to finalize the credit ratings.

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The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- Operational Risk Assessment for Collateralized Loan Obligations (CLOs) and Corporate Collateralized Debt Obligations (CDOs) (September 14, 2023), https://dbrs.morningstar.com/research/420608

-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023), https://dbrs.morningstar.com/research/415687

-- Legal Criteria for U.S. Structured Finance (December 7, 2023), https://dbrs.morningstar.com/research/425081

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.