Cadogan Square CLO VII B.V.

Transcription

1 Presale: Cadogan Square CLO VII B.V. Primary Credit Analyst: Sandeep Chana, London (44) ; Secondary Contacts: Yann Marty, London (44) ; Matthew Jones, London (44) ; Table Of Contents Million Senior Secured Floating-Rate Notes And Subordinated Notes Rationale Notable Features Portfolio Characteristics Recovery Rate Distribution Collateral Pool Guidelines Portfolio Management Collateral Manager Payment Priorities Overcollateralization, Interest Coverage, And Interest Tests Sensitivity Analysis Note Redemption APRIL 12,

2 Table Of Contents (cont.) Events Of Default Issuer Surveillance Related Criteria And Research Appendix: Other Defined Terms APRIL 12,

3 Presale: Cadogan Square CLO VII B.V Million Senior Secured Floating-Rate Notes And Subordinated Notes This presale report is based on information as of April 12, The ratings shown are preliminary. This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings. Preliminary Ratings As Of April 12, 2016 Class Prelim. rating* Prelim. amount (mil. ) Interest rate A AAA (sf) Three-month EURIBOR plus 1.50% B AA (sf) Three-month EURIBOR plus 2.10% C A (sf) Three-month EURIBOR plus 3.00% D BBB (sf) Three-month EURIBOR plus 4.75% E BB (sf) Three-month EURIBOR plus 6.00% Credit enhancement (%) SDR (%) BDR (%) BDR cushion (%) M NR N/A N/A N/A N/A N/A *The rating on each class of securities is preliminary as of April 12, 2016, and subject to change at any time. We expect to assign final credit ratings on the closing date, subject to a satisfactory review of the transaction documents and legal opinions. The preliminary ratings assigned to the class A and B notes address timely payment of interest and ultimate payment of principal. The preliminary ratings assigned to the class C, D, and E notes address the ultimate payment of interest and principal. If a frequency switch event were to occur, the payment frequency would switch to semiannual and the index would switch to six-month EURIBOR. SDR--Scenario default rate. BDR--Break-even default rate. EURIBOR--Euro Interbank Offered Rate. NR--Not rated. N/A--Not applicable. Supplemental Tests Overcollateralization (mil. ) Class Target portfolio Largest industry default test Largest obligor default test A B C N/A D N/A E N/A Sub N/A N/A N/A N/A--Not applicable. Transaction Profile Expected closing date May 2016 Expected effective date Six months after closing period end date May APRIL 12,

4 Transaction Profile (cont.) Noncall period end date May 2018 Stated maturity date May 2029 Total preliminary rated amount (mil. ) Total preliminary note balance (including the subordinated notes) (mil. ) Note proceeds (including unrated and subordinated notes) net of fees (mil. ) Collateral Structure type Structure purpose Management Note payment frequency A revolving pool primarily consisting of broadly syndicated senior secured loans and bonds A cash flow CLO consisting of loans and bonds Arbitrage An actively managed portfolio Quarterly, then semiannually in the event of a frequency switch event First payment date November 2016 Issuer Arranger Trustee Custodian, account bank, paying agency, and calculation agent CLO--Collateralized loan obligation. Cadogan Square CLO VII B.V. Morgan Stanley U.S. Bank Trustee Ltd. Elavon Financial Services Ltd. Portfolio Information As of April 7, 2016 Target assets (mil. ) Target par balance (euro equivalent) Par balance of identified collateral Par balance of collateral not yet identified Standard & Poor's Ratings Services' rating (as a percentage of identified collateral; %) Standard & Poor's implied rating (as % of identified collateral) 0.00 Identified collateral (as % of target par) Obligors in the identified portfolio (target portfolio) Number of obligors 130 (146) Average-obligor holding (%) 0.77 (0.68) Largest-obligor holding (%) 1.75 (1.75) Smallest-obligor holding (%) 0.13 (0.13) Benchmark statistics Maximum weighted-average maturity (approximate years) 8.00 Portfolio weighted-average maturity (years) 6.10 Portfolio weighted-average rating B+ Minimum weighted-average spread (%) 4.20 Portfolio weighted-average spread (incl. floor) (%) 4.99 Minimum weighted-average coupon (%) 6.00 Portfolio weighted-average coupon (%) APRIL 12,

5 Rationale Standard & Poor's Ratings Services has assigned its preliminary credit ratings to Cadogan Square CLO VII B.V.'s floating-rate class A, B, C, D, and E notes. At closing, Cadogan Square CLO VII will also issue an unrated subordinated class of notes. Cadogan Square CLO VII is a European cash flow collateralized loan obligation (CLO), securitizing a portfolio of primarily senior secured euro-denominated leveraged loans and bonds issued by European borrowers. Credit Suisse Asset Management Ltd. is the portfolio manager. Under the transaction documents, the rated notes will pay quarterly interest unless there is a frequency switch event. Following this, the notes will permanently switch to semiannual payment. The portfolio's reinvestment period will end approximately four years after closing. Our preliminary ratings reflect our assessment of the preliminary collateral portfolio's credit quality, which has a weighted-average 'B+' rating. We consider that the portfolio at closing 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 (CDOs; see "Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs," published on Sept. 17, 2015). In our cash flow analysis, we used the euro equivalent of 400 million target par amount, a weighted-average spread (4.20%), a weighted-average coupon (6.00%), and weighted-average recovery rates at each rating level. 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. At closing, the issuer intends to enter into an interest rate cap agreement with a suitably rated counterparty, which will be based on a fixed notional amount with a specified strike rate. If interest rates rise above the specified strike rate, the issuer will receive from the swap counterparty interest proceeds equal to the difference between the then interest rate and the strike rate. Elavon Financial Services Ltd. is the bank account provider and custodian. At closing, we anticipate that the documented downgrade remedies will be in line with our current counterparty criteria (see "Counterparty Risk Framework Methodology And Assumptions," published on June 25, 2013). Following the application of our nonsovereign ratings criteria, we consider that the transaction's exposure to country risk is sufficiently mitigated at the assigned preliminary rating levels (see "Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions," published on June 14, 2011). This is because the concentration of the pool comprising assets in countries rated lower than 'A-' is limited to 10% of the aggregate collateral balance. At closing, we consider that the issuer will be bankruptcy remote, in accordance with our European legal criteria (see "Europe Asset Isolation And Special-Purpose Entity Criteria--Structured Finance," published on Sept. 13, 2013) APRIL 12,

6 Following our analysis of the credit, cash flow, counterparty, operational, and legal risks, we believe our preliminary ratings are commensurate with the available credit enhancement for each class of notes. Notable Features Foreign exchange risk In accordance with the portfolio profile test, the portfolio manager may invest no more than 5% in unhedged and principal-hedged transactions. Unhedged assets (which may only be British pound sterling-denominated assets) may not account for more than 2.5% of the portfolio balance. Principal hedged obligations include those non-euro-denominated obligations that are the subject of a foreign exchange (FX) currency forward transaction, and where (along with any unhedged assets) the portfolio manager will be required to enter into an asset swap within 180 days of the purchase or settlement of such an obligation. Holding such types of obligations will be subject to certain conditions, e.g., that such assets should be purchased on the primary market (with respect to unhedged assets only) and be denominated in sterling, U.S. dollars, Danish krone, Norwegian krone, Swedish krona, Australian dollars, Canadian dollars, Singapore dollars, New Zealand dollars, and Swiss francs. The purchase of these obligations will be subject to discounts in their principal balance and interest cash flows. Furthermore, any purchase of principal-hedge obligations above 2.5% of the current performing portfolio balance (as adjusted) will be subject to that balance being greater than or equal to the current aggregate note balance. The current performing portfolio balance is adjusted by the application of discounts to the principal balance. In our cash flow analysis, we have assumed that 5% of the target par amount are sterling-denominated obligations, and have consequently applied various currency stresses to the transaction, with different sterling LIBOR or Euro Interbank Offered Rate (EURIBOR) curves and different default biases. Our cash flow analysis also takes into account the interest rate cap. Liquidity risk and frequency switch event The notes will pay interest quarterly and incorporate an interest-smoothing account. If the transaction's frequency switch mechanism is triggered (which is determined on the last business day of the month prior to a payment date), the payment frequency on the liabilities switches permanently to semiannual, whereby the scheduled payment date is skipped and the next payment date is in three months from the original scheduled payment date. First period reserve account At closing, the collateral manager expects about 5.00% of the asset pool to be assets that pay interest and principal semiannually. To mitigate any liquidity concerns on the first payment date (if the semiannual pay assets do not pay interest by then), the issuer will deposit 1.50 million at closing into a first period reserve account from the collection account. On the first interest payment date, the issuer will transfer these funds into the interest account for distribution in accordance with the priorities of payment. APRIL 12,

7 Corporate rescue loans The portfolio manager can purchase corporate rescue loans, which pay interest and principal on a current basis. These loans may be obligations of a debtor in possession (DIP) under U.S. bankruptcy law. The transaction documents require DIP loans to have a public issue rating from Standard & Poor's. The loans may also be senior secured credit facilities made to an obligor undergoing a restructuring or an insolvency process. These facilities may either: Rank pari passu with the obligor's other senior unsecured debt, as long as, upon the enforcement of a security, these facilities rank in priority to all other senior secured debt; or Achieve priority over the obligor's other senior secured obligations, otherwise through the grant of a security. For these senior secured credit facilities, the transaction documents require a public issuer credit rating (ICR) or a credit estimate from Standard & Poor's. As the obligor is likely to be rated 'D' or 'SD' (selective default) at the time of the purchase, we treat such loans as defaulted obligations until the earlier of: The receipt of a credit estimate, or The assignment of a public ICR on the restructured obligor. The transaction documents limit the purchase of corporate rescue loans to 5% of the portfolio. Amend-to-extend offers Amend-to-extend restructuring agreements on leveraged loans result in an extension of the loans' final maturity. They also often change the margin on the loans. Under the transaction documents, the issuer can accept amend-to-extend offers, as long as: The asset's extended maturity date does not fall after the notes' maturity date, and The transaction passes the portfolio's documented weighted-average life test after taking the maturity extension into account. Even though we believe the extension of an asset's maturity increases the portfolio's credit risk, we consider that such offers remain limited. In addition, we believe that the borrower's d credit profile compensates for the extension of an asset's maturity. Any compensatory fees paid to the issuer for amend-to-extend restructuring provide additional collateral for the rated notes' benefit. Covenant-lite loans The portfolio manager can purchase up to 35% of "covenant-lite" loans--that is, loans that do not: Contain any financial covenants, or Require the obligor to comply with any maintenance covenant. Trading plans The portfolio manager can regroup reinvestments into a trading plan to satisfy the transaction's reinvestment guidelines, even if an individual trade does not independently satisfy the reinvestment guidelines. The transaction documents: APRIL 12,

8 Limit each trading plan to 5% of the portfolio's principal amount, State that the trading plan may not extend beyond 20 business days, Permit only one trading plan at a time, and Prevent the portfolio manager from entering into future trading plans if a previous plan affected the issuer's compliance with any of the reinvestment guidelines. Risk retention requirements European regulation requires European institutional investors that purchased CLO securities to adhere to the requirement that the original lender, originator, and sponsor of the CLO transaction retains a material net economic interest of at least 5% or incur high regulatory capital charges. We understand that the collateral manager will hold notes on a vertical basis equivalent to 5% or more of the maximum collateral balance in order to meet the retention requirements as the retention holder. Portfolio Characteristics As of April 7, 2016, the issuer had identified a portfolio of a euro equivalent of million, representing 85.75% of the total assets to be acquired. The portfolio target collateral par is a euro-equivalent of 400 million. The information and results presented in tables 1-5 and charts 1-4 reflect the identified collateral pool (where mentioned) and the portfolio composition on the effective date. APRIL 12,

9 Chart 1 APRIL 12,

10 Chart 2 Table 1 Asset Type Distribution Target portfolio (%) Identified portfolio (%) Senior secured loans Secured bond Unsecured bond Subordinated bond APRIL 12,

11 Chart 3 Table 2 Fixed- And Floating-Rate Asset Distribution Target portfolio (%) Identified portfolio (%) Floating-rate loan Fixed-rate loan Floating-rate bond Fixed-rate bond APRIL 12,

12 Chart 4 Table 3 Top Obligor Holdings Obligor reference Industry Standard & Poor's rating Standard & Poor's implied rating CreditWatch/outlook Obligor Cumulative Obligor (%) Cumulative (%) 1 Telecommunications B+ N/A N/A Chemicals and plastics B+ N/A N/A Publishing B N/A N/A Utilities B+ N/A N/A Telecommunications B N/A N/A Business equipment and services 7 Aerospace and defense B+ N/A N/A B N/A N/A Health care B+ N/A N/A Business equipment and services B N/A N/A APRIL 12,

13 Table 3 Top Obligor Holdings (cont.) Obligor reference Industry Standard & Poor's rating Standard & Poor's implied rating CreditWatch/outlook Obligor Cumulative Obligor (%) Cumulative (%) 10 Automotive B N/A N/A N/A--Not applicable. Table 4 Spread And Coupon Distribution --Target portfolio-- --Identified portfolio-- Fixed-rate assets Floating-rate assets Fixed-rate assets Floating-rate assets Percentage of the portfolio (%) Minimum weighted-average spread/coupon covenant (%) Actual weighted-average spread/coupon (%) Actual weighted-average spread, including EURIBOR/LIBOR floors (%) EURIBOR--Euro Interbank Offered Rate Table 5 Country Distribution Identified and target portfolio Target portfolio-- --Identified portfolio--- Transfer and convertibility assessment Sovereign rating Notional amount (mil. ) Notional amount (%) Notional amount (mil. ) Notional amount (%) U.S.* AAA AA Germany* AAA AAA U.K.* AAA AAA France* AAA AA The Netherlands* AAA AAA Luxembourg AAA AAA Belgium* AAA AA Spain AAA BBB Italy* AAA BBB Switzerland* AAA AAA Ireland AAA A Singapore* AAA AAA Sweden* AAA AAA Portugal AAA BB Canada AAA AAA China AA- AA Finland AAA AA Norway AAA AAA APRIL 12,

14 Table 5 Country Distribution (cont.) Identified and target portfolio --Target portfolio-- --Identified portfolio--- Transfer and convertibility assessment Sovereign rating Notional amount (mil. ) Notional amount (%) Notional amount (mil. ) Notional amount (%) Japan* AA+ A *Unsolicted ratings. Recovery Rate Distribution Chart 5 Table 6 Portfolio Weighted-Average Recovery Rate (Based on The Percentage Of Par Value) Rating level Minimum weighted-average recovery rate covenant Identified portfolio recovery rate distribution (based on the percentage of par value; %) Target portfolio recovery rate distribution (based on the percentage of par value; %) AAA AA APRIL 12,

15 Table 6 Portfolio Weighted-Average Recovery Rate (Based on The Percentage Of Par Value) (cont.) Rating level Minimum weighted-average recovery rate covenant Identified portfolio recovery rate distribution (based on the percentage of par value; %) Target portfolio recovery rate distribution (based on the percentage of par value; %) A BBB BB B Collateral Pool Guidelines The collateral pool will comprise primarily euro-denominated and some sterling-denominated senior secured loans and bonds to broadly syndicated corporate borrowers. We expect the collateral portfolio's effective date and reinvestment guidelines to comply with the limitations shown in table 7. Table 7 Collateral Pool Guidelines Type of obligation Limit (percentage of collateral pool; %) Maximum single obligor of senior unsecured, second lien, mezzanine loans, and high-yield bonds 1.5 Maximum single obligor (three execeptions up to 3.0%) 2.5 Maximum obligors domiciled in countries or jurisdictions rated below 'A-' by Standard & Poor's 10.0 Maximum single industry (two exceptions of up to 15.00%) 12.5 Maximum participations 10.0 Maximum corporate rescue loan obligations 5.0 The aggregate of all unfunded amounts under long delayed drawdown obligations and funded amounts/unfunded amounts under revolving obligations The aggregate of all unfunded amounts under short delayed drawdown obligations 5.0 Maximum rated 'CCC+' or lower 7.5 Maximum current pay obligations 2.5 Maximum non-euro obligations 30.0 Maximum fixed-rate collateral obligations 12.5 Minimum senior secured loans 70.0 Maximum unsecured, second lien, mezzanine loans, and high yield-bonds 10.0 Maximum bridge loans 5.0 Maximum covenant-lite loans 35.0 Maximum structured finance securities 0.0 Maximum synthetic exposure 0.0 Maximum project finance loans 0.0 Maximum obligations derived from another NRSRO rating 10.0 Maximum PIK obligations 5.0 Maximum Principal Hedged Obligations APRIL 12,

16 Table 7 Collateral Pool Guidelines (cont.) Type of obligation Limit (percentage of collateral pool; %) Maximum unhedged obligations 2.5 Maximum aggregate of principal hedge obligations and unhedged obligations 5.0 PIK--Payment-in-kind. NRSRO--Nationally Recognized Statistical Rating Organizations. Portfolio Management Under the transaction documents, certain conditions will be satisfied upon the reinvestment of principal proceeds (see tables 8 and 9). Table 8 Summary Of Trading Conditions During Period Conditions to reinvest proceeds from each type of assets sold/received O/C tests New asset minimum par amount Standard & Poor's CDO Monitor test Concentration limitations Collateral quality test New asset with an equal or a higher rating New asset with the same or a shorter maturity Discretionary Maintain or Not less than 100% of the principal balance of assets sold* No No Credit impaired Maintain or Not less than 100% of the sale proceeds of assets sold* N/A No No Credit d Maintain or Not less than 100% of the principal balance of assets sold* No No Defaulted (including recovery on defaulted assets) Passing before and after Not less than 100% of the sale proceeds of assets sold* N/A No No Unscheduled principal (including recoveries) Maintain or Not less than 100% of the principal balance of asset generating proceeds* No No Scheduled principal Maintain or Not less than 100% of the principal balance of asset generating proceeds* No No *Alternatively, (i) if the aggregate collateral balance of the portfolio is greater than or equal to the initial par balance, adjusted for amortized note balance and additional issuance, or (ii) the numerator of the par value test is maintained or d. O/C--Overcollateralization APRIL 12,

17 Table 9 Summary Of Trading Conditions After Period Conditions to reinvest proceeds from each type of assets sold/received O/C tests New asset minimum par amount Standard & Poor's CDO Monitor test Concentration limitations Collateral quality test New asset with an equal or a higher rating New asset with the same or a shorter maturity Discretionary not allowed Credit impaired Passing before and after Not less than 100% of the sale proceeds of assets sold Not required Yes Yes Credit d not allowed Defaulted (including recovery on defaulted assets) not allowed Equity not allowed Unscheduled principal Passing before and after the aggregate collateral balance of the portfolio is greater than or equal to the initial par balance, adjusted for amortized note balance and additional issuance* Not required Yes Yes Scheduled principal not allowed *Alternatively, (i) the numerator of the par value test is maintained or d or (ii) the aggeraget collateral balance is maintained or increased. O/C--Overcollateralization The collateral quality tests will include: The CDO monitor test (during the reinvestment period); The weighted-average recovery rate test; The weighted-average spread test; The weighted-average fixed coupon test; and The weighted-average life test. Collateral Manager The portfolio manager for the CLO will be Credit Suisse Asset Management (CSAM), which is an indirect wholly owned subsidiary of Credit Suisse Group AG. The portfolio manager is an investment advisor regulated by the U.K. Financial Conduct Authority. In our view, CSAM is an experienced CLO manager, with approximately $24.0 billion of CSAM-managed U.S. cash flow CLOs issued since 1998 and 3.0 billion euro CLOs. APRIL 12,

18 Payment Priorities Under the transaction documents, the collateral's interest and principal collections are payable according to separate payment priorities. During and after the reinvestment period On each distribution date during and after the reinvestment period, interest collections are distributed in the priority outlined in table 10. Table 10 Interest Waterfall (During And After The Period) Priority A B C D E F G H I J K L M N O P Q R S T U V W X Y Z Payment Taxes and statutory fees Trustee fees and expenses up to a cap Administrative expenses up to a cap Expense reserve account, at the manager's discretion, up to a cap Senior management fee, then the previously due and unpaid senior management fee Hedge counterparty payments (other than defaulted hedge termination payments) Class A notes' interest Class B notes' interest Class A/B notes' coverage tests. If failed, pay according to the note payment sequence* until cured Class C notes' interest (excluding deferred interest) Class C notes' deferred interest Class C notes' coverage tests. If failed, pay according to the note payment sequence* until cured Class D notes' interest (excluding deferred interest) Class D notes' deferred interest Class D notes' par coverage tests. If failed, pay according to the note payment sequence* until cured Class E notes' interest (excluding deferred interest) Class E notes' deferred interest Class E notes' coverage tests. If failed, pay according to the note payment sequence* until cured Effective date rating event. At the manager's discretion, (x) to purchase assets for reinvestment or (y) pay according to the note payment sequence* until the effective date rating event ceases During the reinvestment period, to reinvest in new collateral until the reinvestment overcollateralization test is satisfied using up to 50% of the available interest proceeds Subordinated management fee, then the previously deferred senior and subordinated management fee Uncapped trustee fees and expenses Uncapped administrative expenses Defaulted hedge termination payments During the reinvestment period, to the collateral enhancement account (at the collateral manager's discretion) To the subordinated notes, until the internal rate of return threshold is reached *Note payment sequence: First, the class A notes until fully redeemed; then the class B notes until fully redeemed; then the class C notes including deferred interest until fully redeemed; then the class D notes including deferred interest until fully redeemed; and then the class E notes including deferred interest until fully redeemed. On each distribution date during and after the reinvestment period, principal collections are distributed in the priority APRIL 12,

19 outlined in table 11. Table 11 Principal Waterfall (During And After The Period) Priority A B C D E F G H I J K L M N O P Payment Items A-I of the interest waterfall, but only if they are not paid in full Item J of the interest waterfall if it is not paid in full, and only if class C is the controlling class Item K of the interest waterfall if it is not paid in full, and only if class C is the controlling class Item L of the interest waterfall if it is not paid in full, and only until the class C notes' coverage tests are met Item M of the interest waterfall if it is not paid in full, and only if class D is the controlling class Item N of the interest waterfall if it is not paid in full, and only if class D is the controlling class Item O of the interest waterfall if it is not paid in full, and only until the class D par coverage test is met Item P of the interest waterfall if it is not paid in full, and only if class E is the controlling class Item Q of the interest waterfall if it is not paid in full, and only if class E is the controlling class Item R of the interest waterfall if it is not paid in full, and only until the class E coverage tests are met Item S of the interest waterfall if it is not paid in full To make payment of special redemption amount on special redemption date in accordance with note payment sequence, at the election of the collateral manager During the reinvestment period, to purchase collateral obligations at the collateral manager's option. After the reinvestment period, to purchase collateral obligations with unscheduled principal proceeds or sale proceeds from credit risk obligations, or credit d obligations, at the collateral manager's option After the reinvestment period, to redeem the notes according to the note payment sequence* Items U-X of the interest waterfall sequentially, if it is not paid in full To the subordinated notes, up to the internal rate of return threshold is reached *Note payment sequence: First, the class A notes until fully redeemed; then the class B notes until fully redeemed; then the class C notes including deferred interest until fully redeemed; then the class D notes including deferred interest until fully redeemed; and then the class E notes including deferred interest until they redeemed. Overcollateralization, Interest Coverage, And Interest Tests In our view, the transaction benefits from certain structural features that require sequential mandatory redemption of the preliminary rated notes if the transaction breaches any overcollateralization or interest coverage test (see table 12). Table 12 Overcollateralization, Interest Coverage, And Interest Tests Class Minimum O/C required (%) Minimum I/C required (%) A/B C D E O/C test N/A O/C--Overcollateralization. I/C- Interest coverage. N/A--Not applicable. APRIL 12,

20 Sensitivity Analysis Recovery rate sensitivity We generated additional scenarios in which we made positive and negative adjustments (10% each) to the collateral pool's recovery rates relative to each tranche's weighted-average recovery rate. Table 13 Recovery Rate Sensitivity Resulting rating transition BDR cushion at indicated rating (%) Class Rating level 10% recovery decrease Current 10% recovery decrease A AAA AA B AA AA C A A D BBB BBB E BB B BDR--Break-even default rate. Correlation sensitivity We generated additional scenarios by adjusting the intra- and inter-industry correlations to assess the portfolio's sensitivity to different correlation assumptions, assuming three correlation scenarios. Table 14 Correlation Sensitivity Correlation Scenario Within industry (%) Between industries (%) Below base-case Base-case equals rating Above base-case Table 15 Correlation Sensitivity Resulting rating transition BDR cushion at indicated rating (%) Class Base-case Below base-case Above base-case Base-case Below base-case Above base-case A AAA AAA AA B AA AA AA C A A A D BBB BBB BBB E BB BB BB BDR--Break-even default rate. APRIL 12,

21 Note Redemption Final redemption Unless previously fully redeemed and canceled, each rated class of notes is redeemed on the maturity date at their outstanding principal amount. Optional redemption in whole--clean-up call After the noncall period, all classes of notes may be redeemed (in whole, but not in part) on any business day at the direction of the subordinated noteholders' (acting by extraordinary resolution) or the retention holder. After the noncall period, the rated notes may also be redeemed (in whole, but not in part) on any payment date at the collateral manager's direction if the aggregate collateral balance is less than 15% of the target par amount. Mandatory redemption If any coverage test is not satisfied, the notes may be redeemed (in whole or in part) on any payment date before their legal final maturity dates. If a mandatory redemption occurs, the issuer uses the available principal and interest proceeds to redeem the notes according to the priority of payments. Redemption following a note tax event If a tax event occurs, the controlling or subordinated noteholders (acting by extraordinary resolution) or the retention holder can instruct to redeem any class of notes (in whole, but not in part) on any payment date before its legal final maturity date. Optional redemption in part by refinancing After the noncall period, the subordinated noteholders (acting by ordinary resolution), the collateral manager, or the retention holder can instruct for any class of notes to be redeemed (in whole, but not in part) solely from the refinancing proceeds. The issuer can acquire the refinancing proceeds by issuing a replacement class of notes. Events Of Default Under certain conditions, the following events of default may result in the acceleration of payments to the preliminary rated notes or the collateral's liquidation: The transaction fails to pay interest, when due and payable, to the class A notes or the class B notes. The transaction fails to pay principal on any class of notes when due and payable at the stated maturity date or any redemption date. The issuer fails to disburse amounts according to the priority of payments within a 10-business-day grace period. The class A overcollateralization ratio falls below 102.5% (as defined in the transaction documents, the event of default overcollateralization ratio is calculated without rating-based discounts, but includes defaulted assets carried at their market value). The issuer materially defaults in performance or materially breaches any covenant, which has a material adverse effect on the noteholders (as determined by the trustee) and is not cured within the 60-day cure period. The issuer voluntarily or involuntarily enters bankruptcy. It becomes unlawful for the issuer to perform or comply with one or more of its obligations under the notes. APRIL 12,

22 The transaction documents require the issuer to register as an investment company under the Investment Company Act of This requirement continues for a 45-day period. Issuer The issuer, Cadogan Square CLO VII, is a special-purpose entity (SPE) that was incorporated in The Netherlands. The issuer's only purposes are to acquire the collateral portfolio, issue the notes, enter into the transaction documents, and engage in certain related transactions. We expect the issuer's SPE provisions to be consistent with our bankruptcy remoteness criteria outlined in our European legal criteria. Surveillance We will maintain active surveillance on the rated notes until the notes mature or are retired, or until we withdraw our ratings in the transaction. The purpose of surveillance is to assess whether the rated notes are performing within the initial parameters and assumptions applied to each rating category. The issuer is required under the terms of the transaction documents to supply periodic reports and notices to Standard & Poor's to maintain continuous surveillance on the rated notes. Related Criteria And Research Related Criteria Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs, Sept. 17, 2015 Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014 Europe Asset Isolation And Special-Purpose Entity Criteria--Structured Finance, Sept. 13, 2013 Counterparty Risk Framework Methodology And Assumptions, June 25, 2013 Global Derivative Agreement Criteria, June 24, 2013 Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012 Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions, June 14, 2011 Understanding Standard & Poor's Rating Definitions, June 3, 2009 Qualification And Treatment Of Current-Pay Obligations In Global Cash Flow CLOs, July 11, 2007 Related Research 2015 EMEA Structured Credit Scenario And Sensitivity Analysis, Aug. 6, 2015 European Structured Finance Scenario And Sensitivity Analysis 2014: The Effects Of The Top Five Macroeconomic Factors, July 8, 2014 Global Structured Finance Scenario And Sensitivity Analysis: Understanding The Effects Of Macroeconomic Factors On Credit Quality, July 2, 2014 What Are Credit Estimates And How Do They Differ From Ratings?, April 6, 2011 Appendix: Other Defined Terms APRIL 12,

23 Break-even default rate (BDR) Standard & Poor's uses its proprietary cash flow model to determine an applicable percentile BDR for each tranche at specific rating levels. The BDR represents Standard & Poor's estimate of the maximum level of gross defaults, based on our stress assumptions, that a tranche can withstand and still fully repay the noteholders (see "Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs," published on Sept. 17, 2015, for full discussion of BDRs and our corporate cash flow criteria). BDR cushion The BDR cushion is the excess of the tranche BDR above the scenario default rate at the assigned rating for a given class of rated notes. Standard & Poor's default measure (DM) DM describes the annualized weighted-average portfolio default rate. DM is computed by taking the average default probability of the assets, weighted by the principal balance, and then annualized by finding the constant annual default rate that gives the weighted-average default probability over the weighted-average maturity of the portfolio. Unlike other measures of average default in use, DM encompasses all assets in the portfolio, including defaulted securities and cash, and it reflects the actual maturity of the assets. Standard & Poor's variability measure (VM) VM describes the annualized standard deviation of portfolio default rates. VM is the degree of variability of the portfolio default rate around its expected value. VM incorporates the effects of relative lumpiness of the assets in the portfolio and the correlation between these assets. It reflects the effective diversity of the portfolio in a manner directly applicable to estimating the probability of different default rates. Standard & Poor's correlation measure (CM) CM is the ratio of the standard deviation of portfolio default rates computed with correlation, divided by the standard deviation computed assuming no correlation. It measures the effect of correlation upon the standard deviation in default rates. For example, if CM equals 1.3, the standard deviation of default rates is 30% greater due to correlation. Standard & Poor's rating The Standard & Poor's rating is the public rating, which is typically the issuer credit rating. Standard & Poor's implied rating The implied Standard & Poor's rating is the rating used in the CDO Evaluator when a Standard & Poor's rating is not available for the related entity or issue. Scenario default rate (SDR) The SDR is the minimum level of portfolio defaults we expect each CDO tranche to be able to support the specific rating level using the Standard & Poor's CDO Evaluator. Subordination Subordination is calculated as the notes' total face amount (including the subordinated notes) that have payment priorities subordinate to the assessed class of notes divided by the notes' total face amount (including the subordinated notes). APRIL 12,

24 Target portfolio The target portfolio consists of collateral that has already been purchased and/or collateral for which a commitment to purchase has been initiated, as well as hypothetical portfolio information that the arrangers present to Standard & Poor's for its rating analysis. Additional Contact: Structured Finance Europe; StructuredFinanceEurope@standardandpoors.com APRIL 12,

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