This report does not constitute a rating action.

Ratings Detail

Rationale

The short-term 'A-1 (sf)' rating on Mackinac Funding Co. LLC’s (Mackinac) U.S. dollar-denominated standard (non-redeemable) asset-backed commercial paper (ABCP) notes reflects the following:

• The program's legal structure, including Mackinac's intended bankruptcy-remote status;
• The global master securities lending agreements (GMSLAs) with BNP Paribas Prime Brokerage International Ltd. (BNPPBL; NR) and BNP Paribas SA (BNPP);
• The guarantee with BNPP, as guarantor of BNPPBL's obligations under the GMSLA;
• The hedge agreements in the form of total return swaps (hedge agreements) with counterparties rated at least 'A-1';
• The amounts received from the GMSLAs and hedge agreements being sufficient to pay the outstanding standard ABCP notes on their respective payment dates;
• ABCP note issuance tests that restrict the amounts to no greater than amounts that can be fully supported by a hedge agreement (or similar instrument) and GMSLA (or similar instrument); and
• Deutsche Bank Trust Co. Americas' (DBTCA's) ability to carry out its duties as program administrative agent.

Environmental, Social, And Governance

The credit quality of the underlying assets is not material to our rating analysis, so there generally are no material environmental, social, and governance (ESG) credit factors at the asset level. Support providers in ABCP conduits are typically highly rated financial institutions, and our assessment of their creditworthiness incorporates any material ESG credit factors. In our view, exposure to ESG factors in this transaction is limited to the factors related to the support provider. In our view, exposure to ESG factors in this transaction is limited to the factors related to the support provider. For further information, see our U.S. and Canadian, EMEA, Asia-Pacific, and Latin American bank ESG in Credit Ratings.

Program Structure

The chart below shows an overview of the program's structure.

Key Features

Mackinac is a bankruptcy-remote special-purpose entity (SPE) and limited liability company (LLC) incorporated under Delaware law to issue U.S. dollar-denominated standard (nonredeemable) ABCP notes. The ABCP notes can be issued at a discount or bear interest at a fixed or floating rate, with maturities of up to 397 days.

Mackinac will use the ABCP note proceeds to make intercompany loans through a credit agreement with NLMCC LLC (AssetCo), a bankruptcy-remote, multi-use SPE and LLC registered under Cayman law. AssetCo will use the proceeds to purchase U.S. treasuries (t-bills, t-notes, t-bonds, and treasury inflation-protected securities) in the open market.

Under the GMSLAs, AssetCo, as lender, will loan the treasuries to a bank, as borrower (rated as high as the ABCP issued). On the loan start date, AssetCo will transfer the treasuries to a bank, as borrower, and receive cash or securities as collateral, as agreed. On the termination date, AssetCo will receive the treasuries and return any collateral, and the bank will pay the loan fee.

Simultaneously, AssetCo will enter into a hedge agreement with one or more counterparties. Under the hedge agreement, AssetCo will transfer the total return on the treasuries and receive a fixed amount from the hedge counterparty. The interest received under the GMSLA (in the form of a loan fee) plus the fixed interest rate under the hedge agreement will be sufficient to cover the interest on the ABCP notes. The principal on ABCP will be covered by the amounts received from the GMSLA and the hedge agreement. The market value risk of the treasuries will be hedged by the hedge counterparty. As a condition precedent for the issuance of short-term debt, the cash flows from the proposed GMSLA and the hedge agreement will be sufficient to repay amounts owed under the terms of the short-term debt.

Program Overview

Counterparty/Credit Quality

Liquidity support

The GMSLA with BNP Paribas Prime Brokerage International Ltd. as guaranteed by BNP Paribas SA, the GMSLA with BNP Paribas SA, and the hedge agreements with counterparties rated at least 'A-1'.

Credit support

The ABCP notes are fully supported by the proceeds received under the GMSLAs, guarantee and the hedge agreements. The payments of the GMSLAs, guarantee, hedge agreements, and ABCP notes are match funded.

Interest rate protection

The interest received under the GMSLAs (in the form of a loan fee) plus the fixed interest rate under the hedge agreement will be sufficient to cover the interest on the ABCP notes.

Foreign exchange hedging

The U.S. treasuries, as well as proceeds from the GMSLAs and hedge agreements are all in U.S. dollars; therefore, foreign exchange hedging is not applicable.

Liquidity outs and limitations

The payments under the GMSLAs, guarantee and hedge agreements are unconditional.

Legal

Substantive consolidation

Mackinac is an LLC incorporated under Delaware law, and its sole member is Nearwater Liquid Markets LLC (Nearwater), according to its formation documents. There is no ongoing economic, financial, or operational dependency on the sponsor, Nearwater, for the performance of the ABCP notes. Nearwater is the sole equity member of both NLMCC LLC and Mackinac. Both NLMCC LLC and Mackinac have been analyzed and are consistent with S&P Global Ratings' bankruptcy remoteness criteria. Non-consolidation opinions were reviewed addressing the substantive consolidation risk that a bankruptcy of Nearwater, as parent, would have on both Mackinac and AssetCo.

Clawback/preference risk

Treasuries are purchased in the open market, which mitigates preference risk. Preference risk relating to payments made by GMSLA, guarantor and hedge counterparties is reflected in the rating on these counterparties.

Cash Flow And Payment Structure

Liability issuance tests

The conditions necessary for DBTCA, as administrator, to issue ABCP notes include but are not limited to:

• Scheduled cash flows from transactions are sufficient to repay in full any related financings;
• Each transaction entered into satisfying rating agency confirmation with non-petition and limited recourse provisions;
• Each transaction counterparty satisfying the minimum rating requirements (that is, at least the current rating on the notes);
• There being no breach of representations and warranties of AssetCo; and
• Any transaction funded complying with the operating guidelines or asset-specific requirements.

Program wind-down events

There are several events that would cause Mackinac to stop issuing the ABCP notes. These events include:

• Events that lead to a stop funding, such as failure to pay fees and expenses, defaults, or termination events with respect to a counterparty;
• Events that lead to an enforcement, such as insolvency of Mackinac or AssetCo or cash flows being insufficient to pay in full any related financings; and
• Operational events that involve a material disruption in communication or third-party events beyond the control of AssetCo.

Waterfall/payment priority

The administrator can allocate proceeds from the available omnibus cash account in the following order of priority:

• Fees and expenses to the administrator not exceeding $200,000 and ensuring all asset monies are sufficient to repay in full any related financings (advances provided by Mackinac to AssetCo via ABCP issuances); then
• Payments due to related financings or to create new assets if directed by AssetCo pari passu with payment of regularly scheduled amounts due related to financings; then
• Payment of any other fees, expenses, and indemnities payable by AssetCo; and then
• Any other fees as directed by AssetCo.

Operational Risk

Review status

Any new transaction counterparty funded in the program will be fully supported by liquidity and credit support providers documented under GMSLAs and hedge agreements schedules and annexes that need prior review by S&P Global Ratings.

Administrator review

The program administrator's experience and past performance are factors in the ratings process. S&P Global Ratings conducts administrator business reviews in consultation with Nearwater to evaluate DBTCA's ability to carry out responsibilities under the program documents, such as:

• Reviewing the related funding request and independently determining whether the proposed asset satisfies the funding requirements;
• Monitoring financing maturities, matching financings to corresponding asset data, and tracking all transactions related to each financing;
• Funding new assets in accordance with the terms of the related funding request; and
• Paying maturing financings and investing excess cash in cash-equivalent investments.

Based on the outcome of the reviews and ongoing communications with Nearwater and DBTCA, we are satisfied that DBTCA is capable of carrying out its responsibilities under the program documents.

Surveillance

Since the ABCP notes are intended to be fully supported based on the proceeds received under the GMSLA as guaranteed by BNPP, the GMSLA with BNPP, and the hedge counterparties rated at least 'A-1', we linked the 'A-1 (sf)' short-term rating on the ABCP notes to the lower of the ratings on BNPP and hedge counterparties rated at least 'A-1'. Therefore, changes to our ratings on any of the GMSLA, guarantor or hedge counterparties, among other things, can result in changes to our rating on the ABCP notes. S&P Global Ratings monitors the ratings on all support providers on an ongoing basis.

Portfolio data

The conduit administrator has provided capacity utilization data for the portfolio as a part of S&P Global Ratings' ABCP conduit surveillance process that is presented below in a standardized format.

Related Criteria

• Criteria | Structured Finance | General: Global Framework For Payment Structure And Cash Flow Analysis Of Structured Finance Securities, Dec. 22, 2020
• U.S. Structured Finance Asset Isolation And Special-Purpose Entity Criteria, May 15, 2019
• Criteria | Structured Finance | General: Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019
• Criteria | Structured Finance | ABCP: Global Methodology For Analyzing Liquidity Funding Outs And Limitations In ABCP Transactions, Oct. 27, 2014
• Criteria | Structured Finance | General: Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014
• General Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012
• Criteria | Structured Finance | ABCP: Asset-Backed Commercial Paper Issued By Multiseller Conduits: Classification And Timing Of Reviews For New-Seller Transactions, April 18, 2011
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
• Criteria | Structured Finance | ABCP: S&P Global Ratings' Analysis Of ABCP Ratings Following Changes To Ratings On Support Providers, Dec. 18, 2008
• Criteria | Structured Finance | ABCP: Global Asset-Backed Commercial Paper Criteria, Sept. 29, 2005

Related Research

• Global Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016
• Standard & Poor's Clarifies Its Approach To Requests For Rating Agency Confirmation On Structured Finance Transactions, May 18, 2012
• Assessing Credit Quality By The Weakest Link, Feb. 13, 2012
• Standard & Poor's Requests Transaction Performance Metrics From Sponsors Or Administrators Of Global ABCP Conduits, Jan. 12, 2012