| Ratings | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Class | Prelim. rating* | Prelim. amount (mil. €) | Subordination (%) | Interest rate§ | ||||||
| A | NR | 248.00 | 38.00 | Three/six-month EURIBOR plus 1.73% | ||||||
| B | AA (sf) | 38.00 | 28.50 | Three/six-month EURIBOR plus 2.45% | ||||||
| C | A (sf) | 23.20 | 22.70 | Three/six-month EURIBOR plus 3.30% | ||||||
| D | BBB- (sf) | 27.20 | 15.90 | Three/six-month EURIBOR plus 5.60% | ||||||
| E | BB- (sf) | 18.40 | 11.30 | Three/six-month EURIBOR plus 8.12% | ||||||
| F† | B- (sf) | 18.40 | 6.70 | Three/six-month EURIBOR plus 10.50% | ||||||
| Sub | NR | 41.70 | N/A | N/A | ||||||
| *The preliminary rating assigned to the class B notes addresses timely interest and ultimate payments. The preliminary ratings assigned to the class C to F notes address ultimate interest and principal payments. §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 will not be issued at closing. EURIBOR--Euro Interbank Offered Rate. NR--Not rated. N/A--Not applicable. | ||||||||||
Overview
- Contego CLO XII DAC is a European cash flow CLO securitization of a revolving pool, comprising euro-denominated senior secured loans and bonds issued mainly by speculative-grade borrowers. Five Arrows Managers LLP will manage the transaction.
- We assigned our preliminary ratings to the class B, 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) Dec. 7, 2023--S&P Global Ratings today assigned its preliminary credit ratings to Contego CLO XII DAC's class B, C, D, E, and F notes. At closing, the issuer will also issue unrated class A notes and unrated subordinated notes (see list above).
The class F notes is a delayed draw tranche, which has a maximum notional amount of €18.40 million and a spread of three/six-month Euro Interbank Offered Rate (EURIBOR) plus 10.50%. The class F notes can only be issued once and only during the reinvestment period with an issuance amount totaling €18.40 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 five 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 | 2,931.89 |
| Default rate dispersion | 392.02 |
| Weighted-average life (years) | 4.52 |
| Weighted-average life (years) extended to cover the length of the reinvestment period | 5.10 |
| Obligor diversity measure | 131.60 |
| Industry diversity measure | 19.35 |
| Regional diversity measure | 1.33 |
| Transaction key metrics | |
|---|---|
| Current | |
| Total par amount (mil. €) | 400.00 |
| Defaulted assets (mil. €) | 0.00 |
| Number of performing obligors | 144 |
| Portfolio weighted-average rating derived from our CDO evaluator | B |
| 'CCC' category rated assets (%) | 1.50 |
| 'AAA' weighted-average recovery (%) | 34.84 |
| Weighted-average spread net of floors (%) | 4.26 |
| Weighted-average coupon (%) | 5.36 |
In our cash flow analysis, we modeled the €400 million target par amount, the actual weighted-average spread of 4.26%, the actual weighted-average coupon of 5.36%, and the actual 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 sufficiently mitigated 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).
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 consider the transaction's legal structure will be bankruptcy remote, in line with our legal criteria (see "Structured Finance: Asset Isolation And Special-Purpose Entity Methodology," published on March 29, 2017).
Our credit and cash flow analysis indicates that the available credit enhancement for the class B to E 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 preliminary ratings on these notes.
The class F notes' current break-even default rate cushion is negative at the current rating level. Nevertheless, 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 further reflects several factors, including:
- The class F notes' available credit enhancement, which is in the same range as that of other CLOs we have rated and that have recently been issued in Europe.
- Our model-generated portfolio default risk, which is at the 'B-' rating level at 23.35% (for a portfolio with a weighted-average life of 5.10 years) versus 15.81% if we were to consider a long-term sustainable default rate of 3.1% for 5.10 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 the assigned preliminary 'B- (sf)' rating.
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 B to F notes.
In addition to our standard analysis, we have also included the sensitivity of the ratings on the class B to E notes based on four hypothetical scenarios.
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
We regard the exposure to environmental, social, and governance (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 assets from being related to certain activities, including, but not limited to the following: the trade in endangered or protected wildlife, the production of or trade in pornography, the production of or trade in tobacco, the provision of services relating to payday lending, and opioid drug manufacturing and distribution. Accordingly, since the exclusion of assets from these industries 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.
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
- 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
- Weekly European CLO Update, Dec. 6, 2023
- CLO Pulse Q2 2023: The 'Snooze Drag' Takes Hold In Europe, Sept. 28, 2023
- European Secured Debt Recovery Estimates Q1 2023: Refinancing Is Fueling Issuance, Recoveries Stable, July 13, 2023
- Credit Conditions Europe Q3 2023: The Slow Burn of Rising (Real) Rates, June 27, 2023
- Credit Conditions Europe Q4 2023: Resilience Under Pressure Amid Tighter Financial Conditions, Sept. 26, 2023
- Credit Conditions Europe Q1 2024: Adapting To New Realities, Nov. 28, 2023
- Leveraged Finance: A 10-Year Lookback At Actual Recoveries And Recovery Ratings, Feb. 4, 2019
- 2017 EMEA Structured Credit Scenario And Sensitivity Analysis, July 6, 2017
- European Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016
- Global 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 Contacts: | David Maman, Paris +33 1 4075 2518; david.maman@spglobal.com |
| Emanuele Tamburrano, London + 44 20 7176 3825; emanuele.tamburrano@spglobal.com |
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