DBRS Morningstar Confirms Ratings on Series 2017-2 Notes Issued by Muskoka USD Limited 2017-2

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on the Series 2017-2 Class A Guarantee Linked Notes (the Class A Notes), the Series 2017-2 Class B Guarantee Linked Notes (the Class B Notes), and the Series 2017-2 Class C Guarantee Linked Notes (the Class C Notes; together with the Class A Notes and Class B Notes, the Notes) issued by Muskoka USD Limited (Muskoka or the Issuer) at AAA (sf), AA (low) (sf), and BBB (sf), respectively, referencing the Loan Portfolio Financial Guarantee (the Financial Guarantee) dated as of September 28, 2017, between Muskoka as Guarantor and the Bank of Montreal (rated AA with Stable trend by DBRS Morningstar) 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 Financial Guarantee). The payment of the interest due on the Notes is subject to the Beneficiary’s ability to pay the Guarantee Fee Amount (as defined in the Financial Guarantee).

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 that is used to assign a rating to the facility sufficient to assess portfolio credit quality.

On the Effective Date (as defined in the Financial Guarantee), the Issuer used the proceeds of the issuance of the Class A Notes and Class E Notes to make a deposit into the Class A and Class E Cash Deposit Accounts and used the proceeds of the issuance of the Class B, C, and D Notes to make a deposit into the Class B, C, and D Cash Deposit Accounts (together, the Cash Deposit Banks). DBRS Morningstar may review the ratings on the Notes if the Cash Deposit Banks are downgraded below certain thresholds as defined in the transaction documents.

Following the delivery of an Enforcement Notice (as defined in the Terms and Conditions of the Notes), amounts payable will be applied in accordance with the Post-Enforcement Priority of Payments (as defined in the Terms and Conditions of the Notes), which could affect DBRS Morningstar’s ratings on the Notes at that time.

As the Coronavirus Disease (COVID-19) spread around the world, certain countries imposed quarantines and lockdowns, including the United States, which accounts for over one-quarter of confirmed cases worldwide. The coronavirus pandemic has adversely affected not only the economies of the nations most afflicted with the coronavirus, but also the overall global economy with diminished demand for goods and services as well as disrupted supply chains. This may result in deteriorated financial conditions for many companies and obligors, some of which will experience the effects of such negative economic trends more than others. At the same time, governments and central banks in multiple regions, including the United States and Europe, have taken significant measures to mitigate the economic fallout from the coronavirus pandemic.

In conjunction with DBRS Morningstar’s commentary “Global Macroeconomic Scenarios: Implications for Credit Ratings” published on April 16, 2020, and updated in its “Global Macroeconomic Scenarios: June Update” commentary on June 1, 2020, DBRS Morningstar further considers additional adjustments to assumptions for the collateralized loan obligation (CLO) asset class that consider the moderate economic scenario outlined in the commentaries. The adjustments include a higher default assumption for the weighted-average (WA) credit quality of the current collateral obligation portfolio. To derive the higher default assumption, DBRS Morningstar notches ratings for obligors in certain industries and obligors at various rating levels based on their perceived exposure to the adverse disruptions caused by the coronavirus. Considering a higher default assumption would result in losses that exceed the original default expectations for the affected classes of notes. DBRS Morningstar may adjust the default expectations further if the duration or severity of the adverse disruptions caused by the coronavirus change.

DBRS Morningstar ran an additional higher default adjustment on the WA DBRS Morningstar Risk Score of the current collateral obligation pool with the maximum covenanted tenor, and this stressed modeling pool was run through the Monte Carlo simulation component of DBRS Morningstar’s CLO Asset Model to generate a stressed default rate. DBRS Morningstar considered the results of this additional default adjustment for the above rating actions.

For more information regarding DBRS Morningstar’s simplified set of macroeconomic scenarios for select economies related to the coronavirus, please see its April 16, 2020, commentary “Global Macroeconomic Scenarios: Implications for Credit Ratings” at https://www.dbrsmorningstar.com/research/359679; its April 22, 2020, commentary “Global Macroeconomic Scenarios: Application to Credit Ratings” at https://www.dbrsmorningstar.com/research/359903; and its June 1, 2020, updated commentary, “Global Macroeconomic Scenarios: June Update” at https://www.dbrsmorningstar.com/research/361867.

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

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating CLOs and CDOs of Large Corporate Credit (February 28, 2020) and Mapping Financial Institution Internal Ratings to DBRS Morningstar Ratings for Global Structured Credit Transactions (March 11, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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 (DBRS Morningstar) for use in the European Union. 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” 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 the Bank of Montreal’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” methodology.

The last rating action on this transaction took place on April 30, 2019.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Lead Analyst: Quan Yoon, CFA, Assistant Vice President, U.S. Structured Credit
Rating Committee Chair: Jerry van Koolbergen, Managing Director, Head of U.S. Structured Credit
Initial Rating Date: September 26, 2017

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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Tel. +1 212 806-3277

-- Rating CLOs and CDOs of Large Corporate Credit and CLO Asset Model Version 2.2.3 (February 28, 2020)
https://www.dbrsmorningstar.com/research/357452/rating-clos-and-cdos-of-large-corporate-credit

-- Cash Flow Assumptions for Corporate Credit Securitizations (February 28, 2020)
https://www.dbrsmorningstar.com/research/357453/cash-flow-assumptions-for-corporate-credit-securitizations

-- Mapping Financial Institution Internal Ratings to DBRS Morningstar Ratings for Global Structured Credit Transactions (March 11, 2020)
https://www.dbrsmorningstar.com/research/357853/mapping-financial-institution-internal-ratings-to-dbrs-morningstar-ratings-for-global-structured-credit-transactions

-- Legal Criteria for U.S. Structured Finance (January 21, 2020)
https://www.dbrsmorningstar.com/research/355719/legal-criteria-for-us-structured-finance