DBRS and Morningstar Credit Ratings Updates U.S. Structured Credit Collateralized Loan Obligation Asset Class Coverage and Requests Comments on Proposed CLO Methodology Updates

On July 11, 2019, Morningstar Credit Ratings, LLC (MCR) and DBRS, Inc. (DBRS, and together with MCR, DBRS Morningstar) published their first announcement regarding the integration of their respective analytical teams focused on the U.S. Structured Finance market. Today’s press release is the thirty-third in a series to keep the market updated on analytical integration decisions and is focused on the U.S. Structured Credit sector.

<a href="https://www.dbrsmorningstar.com/research/347875/" target="_blank">“DBRS and Morningstar Credit Ratings Announce Analytical Integration Process and Ratings Overlap”</a>

In a subsequent press release dated November 11, 2019, DBRS Morningstar stated it would continue to evaluate both rating agencies’ methodologies and analytics with regard to U.S. Collateralized Loan Obligation (CLO) transactions and may publish subsequent analytical integration decisions at a future date.

For more information related to the DBRS Morningstar U.S. Structured Credit CLO asset class coverage effective November 12, 2019, please see the following press release:

<a href="https://www.dbrsmorningstar.com/research/352625/" target="_blank">“DBRS and Morningstar Credit Ratings Confirm U.S. Structured Credit Collateralized Loan Obligation Asset Class Coverage”</a>

Further to the additional evaluation, DBRS Morningstar concluded that, effective on the finalization of the Request for Comment (RFC) period described herein, any new rating engagements in this asset class will be rated using the following DBRS methodologies:

-- “Rating CLOs and CDOs of Large Corporate Credit” (as updated), and
-- “Cash Flow Assumptions for Corporate Credit Securitizations” (as updated), and
-- “Operational Risk Assessment for Collateralized Loan Obligation and Collateralized Debt Obligation Managers of Large Corporate Credits” (collectively, the DBRS CLO Methodologies)

REQUEST FOR COMMENT
In addition, today DBRS is also publishing a RFC on the proposed update(s) to the following DBRS methodologies:
-- “Rating CLOs and CDOs of Large Corporate Credit” (February 28, 2020) and
-- “Cash Flow Assumptions for Corporate Credit Securitizations” (February 28, 2020; together, the DBRS RFC CLO Rating Methodologies).

The material changes to the DBRS RFC CLO Rating Methodologies address the following items:
(1) Asset Pool Default Analysis
-- Clarification on the use of the Stressed Modeling Pool analytical tool

(2) Collateral Quality Matrix and Dynamic Leverage:
-- Usage of linear interpolation when analyzing transactions that contain large collateral quality matrices
-- Ability to infer stressed modeling pools for transactions that utilize formulaic reinvestment constraints

(3) Assessing Seniority:
-- The definition of Senior Secured Loan is updated to not explicitly exclude loans secured primarily by the common stock of an operating subsidiary

The changes are deemed material as they are intended to address a wider variety of structural provisions in assigning and monitoring ratings on U.S. and European CLO transactions.

No changes are proposed to the DBRS CLO Asset Model v.2.2.3.

Comments should be received on or before July 16, 2020. Please submit your comments to the following email address: sfcomments@dbrsmorningstar.com. DBRS Morningstar publishes on its website all comments received, except in cases where confidentiality is requested by the respondent.

DBRS RATINGS ON U.S. AND EUROPEAN CLO TRANSACTIONS
DBRS does not expect the updates contemplated in the DBRS RFC CLO Rating Methodologies to impact any applicable outstanding DBRS ratings on U.S. and European CLO transactions.

MCR RATINGS ON U.S. CLO TRANSACTIONS
As of November 11, 2019, MCR placed all outstanding MCR ratings on U.S. CLO transactions Under Review – Analytical Integration Review. For more information related to MCR’s rating actions on its outstanding U.S. CLO transactions taken on November 11, 2019, please see the following rating announcement:

<a href="https://ratingagency.morningstar.com/PublicDocDisplay.aspx?i=cikhXDs5nfI%3d&m=&s=LviRtUKXqs8kml5dHt7FTeE2SZmY0Fvqd4iX49Mk%2f9UapyiFTEO6TA%3d%3d" target="_blank">“Morningstar Credit Ratings Places Ratings on U.S. CLO Transactions Under Review”</a>

During the RFC period, the outstanding MCR ratings on U.S. CLO transactions will remain Under Review – Analytical Integration Review and MCR will continue to monitor the relevant ratings in accordance with its “U.S. CLO Ratings Methodology” and “U.S. ABS General Ratings Methodology.”

Upon the finalization of the RFC period, DBRS Morningstar expects to assign new DBRS Morningstar ratings to the relevant MCR U.S. CLO transactions using the DBRS CLO Methodologies (as updated).

The rating opinions on outstanding MCR U.S. CLO transactions, which are monitored in accordance with MCR’s U.S. CLO rating methodologies, may not be of comparable credit quality as rating opinions on outstanding DBRS U.S. CLO transactions or new DBRS ratings that may be assigned to new U.S. CLO transactions prior to the finalization of the RFC, in each case assigned or monitored, as applicable, in accordance with the DBRS CLO Methodologies.

For analytical inquiries regarding this press release, please contact Jerry van Koolbergen, Managing Director, U.S. Structured Credit.

DBRS
Jerry van Koolbergen
jerry.vankoolbergen@dbrsmorningstar.com
+1 212 806 3260

For rating engagement inquiries regarding the U.S. Structured Credit asset class coverage or any asset classes not listed, please contact Sean O’Connor, Managing Director, Head of Global Business Development.

DBRS
Sean O’Connor
sean.oconnor@dbrsmorningstar.com
+1 212 806 3252

For more information on the transactions rated by DBRS, please visit http://www.dbrs.com or contact DBRS at info@dbrs.com. For transactions rated by MCR, please visit http://www.morningstarcreditratings.com or contact ratingagency@morningstar.com.

DBRS
Stephen Bernard
stephen.bernard@dbrsmorningstar.com
+1 212 806 3240

Notes:
DBRS Morningstar methodologies are publicly available on its website www.dbrsmorningstar.com under Methodologies & Criteria.

For more information on this methodology or on this industry, visit www.http://dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.