| Ratings List | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Class | Prelim. rating | Prelim. amount (mil. €) | Subordination (%) | Interest rate* | ||||||
| A | AAA (sf) | 175.50 | 41.50 | Three/six-month EURIBOR plus 2.00% | ||||||
| B-1 | AA (sf) | 20.80 | 31.23 | Three/six-month EURIBOR plus 3.40% | ||||||
| B-2 | AA (sf) | 10.00 | 31.23 | 6.50% | ||||||
| C | A (sf) | 18.00 | 25.23 | Three/six-month EURIBOR plus 4.50% | ||||||
| D | BBB- (sf) | 19.50 | 18.73 | Three/six-month EURIBOR plus 5.83% | ||||||
| E | BB- (sf) | 15.00 | 13.73 | Three/six-month EURIBOR plus 7.92% | ||||||
| F§ | B- (sf) | 15.00 | 8.73 | Three/six-month EURIBOR plus 8.50% | ||||||
| Sub | NR | 32.00 | N/A | N/A | ||||||
| *The payment frequency switches to semiannual and the index switches to six-month EURIBOR when a frequency switch event occurs. §The class F notes is a delayed drawdown tranche, which is not issued at closing. EURIBOR--Euro Interbank Offered Rate. NR--Not rated. N/A—-Not applicable. | ||||||||||
Overview
- Contego CLO X DAC is a European cash flow CLO securitization of a revolving pool, comprising euro-denominated senior secured loans and bonds issued mainly by sub-investment grade borrowers. Five Arrows Managers LLP manages the transaction.
- We have assigned our preliminary ratings to the class A, B-1, B-2, C, D, E, and F notes.
- The preliminary ratings reflect our view of the transaction's diversified collateral pool, credit enhancement, and legal structure, among other factors.
LONDON (S&P Global Ratings) Oct. 10, 2022--S&P Global Ratings today assigned its preliminary credit ratings to Contego CLO X DAC's class A, B-1, B-2, C, D, E, and F notes. The issuer also issued unrated subordinated notes (see list above).
The class F notes is a delayed draw tranche, which has a maximum notional amount of €15 million and a spread of three/six-month Euro Interbank Offered Rate (EURIBOR) plus 8.50%. The class F notes can only be issued once and only during the reinvestment period with an issuance amount totaling €15.00 million. The issuer will use the full proceeds received from the sale of the class F notes to redeem the subordinated notes. Upon issuance, the class F notes' spread could be subject to a variation and, if higher, is subject to rating agency confirmation.
This is a European cash flow CLO transaction, securitizing a pool of primarily syndicated senior secured loans or bonds. The portfolio's reinvestment period ends approximately four and half years after closing, and the portfolio's maximum average maturity date is eight and half years after closing. Under the transaction documents, the rated notes pay quarterly interest unless there is a frequency switch event. Following this, the notes will switch to semiannual payment.
We consider that the portfolio on the effective date will be well-diversified, primarily comprising broadly syndicated speculative-grade senior secured term loans and senior secured bonds. Therefore, we have conducted our credit and cash flow analysis by applying our criteria for corporate cash flow collateralized debt obligations (see "Global Methodology And Assumptions For CLOs And Corporate CDOs," published on June 21, 2019).
| Portfolio Benchmarks | |
|---|---|
| Current | |
| S&P Global Ratings weighted-average rating factor | 2,892.25 |
| Default rate dispersion | 369.01 |
| Weighted-average life (years) | 5.001 |
| Obligor diversity measure | 128.10 |
| Industry diversity measure | 18.19 |
| Regional diversity measure | 1.32 |
| Transaction Key Metrics | |
|---|---|
| Current | |
| Total par amount (mil. €) | 300 |
| Defaulted assets (mil. €) | 0 |
| Number of performing obligors | 142 |
| Portfolio weighted-average rating derived from our CDO evaluator | B |
| 'CCC' category rated assets (%) | 0.00 |
| Covenanted 'AAA' weighted-average recovery (%) | 34.32 |
| Weighted-average spread net of floors (%) | 3.95 |
In our cash flow analysis, we modeled the €300 million target par amount, the covenanted weighted-average spread of 3.85%, the covenanted weighted-average coupon of 4.60%, and the covenanted weighted-average recovery rates for all rated notes. We applied various cash flow stress scenarios, using four different default patterns, in conjunction with different interest rate stress scenarios for each liability rating category.
Following the application of our structured finance sovereign risk criteria, we consider the transaction's exposure to country risk to be limited at the assigned preliminary ratings, as the exposure to individual sovereigns does not exceed the diversification thresholds outlined in our criteria (see "Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions," published on Jan. 30, 2019).
At closing, we expect that the transaction's documented counterparty replacement and remedy mechanisms will adequately mitigate its exposure to counterparty risk under our current counterparty criteria (see "Counterparty Risk Framework: Methodology And Assumptions," published on March 8, 2019).
We expect the transaction's legal structure to be bankruptcy remote, in line with our legal criteria (see "Structured Finance: Asset Isolation And Special-Purpose Entity Methodology," published on March 29, 2017).
Following our analysis of the credit, cash flow, counterparty, operational, and legal risks, we believe that our preliminary ratings are commensurate with the available credit enhancement for the class A, B-1, B-2, C, D, E, and F notes. Our credit and cash flow analysis indicates that the available credit enhancement for the class B-1, B-2, C, and D notes is commensurate with higher ratings than those we have assigned. However, as the CLO will have a reinvestment period, during which the transaction's credit risk profile could deteriorate, we have capped our assigned ratings on these notes.
The class F notes' current break-even default rate (BDR) cushion is negative at the 'B-' rating level. Based on the portfolio's actual characteristics and additional overlaying factors, including our long-term corporate default rates and recent economic outlook, we believe this class is able to sustain a steady-state scenario, in accordance with our criteria (see "Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings," published on Oct. 1, 2012). Our analysis reflects several factors, including:
- The class F notes' available credit enhancement is in the same range as that of other CLOs we have rated and that have recently been issued in Europe.
- Our BDR at the 'B-' rating level is 21.12% versus a portfolio default rate of 15.50% if we were to consider a long-term sustainable default rate of 3.1% for a portfolio with a weighted-average life of 5.00 years.
- Whether the tranche is vulnerable to non-payment in the near future.
- If there is a one-in-two chance for this note to default.
- If we envision this tranche to default in the next 12-18 months.
Following this analysis, we consider that the available credit enhancement for the class F notes is commensurate with a preliminary 'B- (sf)' rating.
In addition to our standard analysis, to provide an indication of how rising pressures among speculative-grade corporates could affect our ratings on European CLO transactions, we have also included the sensitivity of the ratings on the class A to E notes to five of the 10 hypothetical scenarios we looked at in our publication, "How Credit Distress Due To COVID-19 Could Affect European CLO Ratings," published on April 2, 2020. The results are shown in the chart below.
As our ratings analysis makes additional considerations before assigning ratings in the 'CCC' category, and we would assign a 'B-' rating if the criteria for assigning a 'CCC' category rating are not met, we have not included the above scenario analysis results for the class F notes.
Environmental, social, and governance (ESG) factors
We regard the exposure to ESG credit factors in the transaction as being broadly in line with our benchmark for the sector (see "ESG Industry Report Card: Collateralized Loan Obligations," published on March 31, 2021). Primarily due to the diversity of the assets within CLOs, the exposure to environmental credit factors is viewed as below average, social credit factors are below average, and governance credit factors are average. For this transaction, the documents prohibit/limit the manager from investing in activities related to extraction of thermal coil and fossil fuels, oil sands and pipelines, restricted weapons, endangered species, pornography, adult entertainment or prostitution, tobacco, payday lending, opioids, food commodity derivatives, palm oil and palm fruit products, any unlicensed and unregistered financing, hazardous chemicals, ozone-depleting substances, and casinos or gambling. Since the exclusion of assets related to these activities does not result in material differences between the transaction and our ESG benchmark for the sector, no specific adjustments have been made in our rating analysis to account for any ESG-related risks or opportunities.
Environmental, social, and governance (ESG) corporate credit indicators
The influence of ESG factors in our credit rating analysis of European CLOs primarily depends on the influence of ESG factors in our analysis of the underlying corporate obligors. To provide additional disclosure and transparency of the influence of ESG factors for the CLO asset portfolio in aggregate, we've calculated the weighted-average and distributions of our ESG credit indicators for the underlying obligors (see "The Influence Of Corporate ESG Factors In Our Credit Rating Analysis Of European CLOs," published on April 20, 2022). We regard this transaction's exposure as being broadly in line with our benchmark for the sector (see "ESG Credit Indicator Report Card: Global CLOs," published on July 12, 2022), with the environmental and social credit indicators concentrated primarily in category 2 (neutral) and the governance credit indicators concentrated in category 3 (moderately negative).
| Corporate ESG Credit Indicators | ||||||||
|---|---|---|---|---|---|---|---|---|
| Environmental | Social | Governance | ||||||
| Weighted-average credit indicator* | 2.05 | 2.07 | 2.95 | |||||
| E-1/S-1/G-1 distribution (%) | 1.33 | 0.67 | 0.00 | |||||
| E-2/S-2/G-2 distribution (%) | 73.34 | 75.15 | 10.98 | |||||
| E-3/S-3/G-3 distribution (%) | 5.47 | 2.67 | 64.17 | |||||
| E-4/S-4/G-4 distribution (%) | 0.00 | 1.67 | 2.67 | |||||
| E-5/S-5/G-5 distribution (%) | 0.00 | 0.00 | 2.34 | |||||
| Unmatched obligor (%) | 13.61 | 13.61 | 13.61 | |||||
| Unidentified asset (%) | 6.24 | 6.24 | 6.24 | |||||
| *Only includes matched obligor | ||||||||
Related Criteria
- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
- Criteria | Structured Finance | General: Global Framework For Payment Structure And Cash Flow Analysis Of Structured Finance Securities, Dec. 22, 2020
- Criteria | Structured Finance | General: Methodology To Derive Stressed Interest Rates In Structured Finance, Oct. 18, 2019
- Criteria | Structured Finance | CDOs: Global Methodology And Assumptions For CLOs And Corporate CDOs, June 21, 2019
- Criteria | Structured Finance | General: Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019
- Criteria | Structured Finance | General: Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions, Jan. 30, 2019
- Legal Criteria: Structured Finance: Asset Isolation And Special-Purpose Entity Methodology, March 29, 2017
- Criteria | Structured Finance | General: Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014
- General Criteria: Methodology Applied To Bank Branch-Supported Transactions, Oct. 14, 2013
- Criteria | Structured Finance | General: Global Derivative Agreement Criteria, June 24, 2013
- General Criteria: Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 1, 2012
- General Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
Related Research
- ESG Credit Indicator Report Card: Global CLOs, July 12, 2022
- The Influence Of Corporate ESG Factors In Our Credit Rating Analysis Of European CLOs, April 20, 2022
- ESG Industry Report Card: Collateralized Loan Obligations, March 31, 2021
- How Credit Distress Due To COVID-19 Could Affect European CLO Ratings, April 2, 2020
- 2017 EMEA Structured Credit Scenario And Sensitivity Analysis, July 6, 2017
- Global Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016
- European Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016
| Primary Credit Analyst: | Rebecca Mun, London + 44 20 7176 3613; rebecca.mun@spglobal.com |
| Secondary Contact: | Emanuele Tamburrano, London + 44 20 7176 3825; emanuele.tamburrano@spglobal.com |
| Research Contributor: | Sukhmani Kohli, CRISIL Global Analytical Center, an S&P affiliate, Mumbai |
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