Jubilee CLO 2013-X B.V.

Transcription

1 Presale: Jubilee CLO 2013-X B.V. This presale report is based on information as of Jan. 30, 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 Class Preliminary rating* Preliminary amount (mil. ) Interest rate A-R AAA (sf) Six-month or three-month EURIBOR plus 0.96% X AAA (sf) 2.0 Six-month or three-month EURIBOR plus 0.85% B-1R AA (sf) 42.4 Six-month or three-month EURIBOR plus 1.55% B-2R AA (sf) 7.3 Six-month or three-month EURIBOR plus 1.76%/1.55% C-1R (deferrable) C-2R (deferrable) A (sf) 15.5 Six-month or three-month EURIBOR plus 2.35% A (sf) 7.9 Six-month or three-month EURIBOR plus 2.56%/2.35% Subordination (%) SDR (%) BDR (%) BDR cushion (%) Primary Credit Analyst: Abhijit A Pawar, London (44) ; abhijit.pawar@spglobal.com Secondary Contacts: Gabriella Vicko, London ; gabriella.vicko@spglobal.com See complete contact list on last page(s) JANUARY 30,

2 Preliminary Ratings (cont.) Class D-R (deferrable) E-R (deferrable) Preliminary rating* Preliminary amount (mil. ) Interest rate BBB (sf) 20.7 Six-month or three-month EURIBOR plus 3.40% BB (sf) 24.1 Six-month or three-month EURIBOR plus 6.00% F (deferrable) B- (sf) 11.6 Six-month or three-month EURIBOR plus 7.76% Subordinated notes Subordination (%) SDR (%) BDR (%) BDR cushion (%) NR 54.8 N/A N/A N/A N/A N/A *The rating on each class of securities is preliminary and subject to change at any time. The preliminary ratings assigned to the class X, A-R, B-1R, and B-2R notes address timely interest and ultimate principal payments. The preliminary ratings assigned to the class C-1R, C-2R, D-R, E-R, and F notes address ultimate interest and principal payments. The payment frequency will switch to semiannual and the index will switch to six-month EURIBOR when a frequency switch event occurs. The class B2-R and C2-R notes will not be floored at zero for the first two years. NR--t rated. N/A--t applicable. EURIBOR--Euro Interbank Offered Rate. Executive Summary Jubilee CLO 2013-X B.V. is a European cash flow collateralized loan obligation (CLO). The transaction is a reset of an existing transaction which closed in July 2013 (see "Jubilee CLO 2013-X B.V Million tes Rated," published on July 15, 2013). The proceeds from the issuance of the class A-R, B-1R, B-2R, C-1R, C-2R, D-R, E-R, and F notes will be used to redeem the original notes issued in The issuer is a special-purpose entity (SPE) that was incorporated as a private company with limited liability under the laws of 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 to be bankruptcy remote, in line with our European legal criteria (see "Europe Asset Isolation And Special-Purpose Entity Criteria--Structured Finance," published on Sept. 13, 2013). The assets securing the notes will consist of a portfolio of secured senior loans, secured senior bonds, unsecured senior obligations, mezzanine obligations and high yield bonds managed by Alcentra Ltd. (the collateral manager). Based on provisions in the transaction documents: The transaction will be collateralized by at least 90.0% senior secured loans and bonds. A maximum of 5% of the loans in the collateral pool can be fixed-rate. 100% of the identified underlying collateral obligations have credit ratings assigned by S&P Global Ratings. Maximum exposure to assets rated in the 'CCC' category ('CCC+', 'CCC', or 'CCC-') will be 7.5%. JANUARY 30,

3 Key Credit Metrics Selected Credit Metrics Jubilee CLO 2013-X B.V. Three-month average* Total leverage (x) Weighted average cost of debt (%) Subordination ('AAA') (%) Modelled WAS (%) Modelled WAC (%) Excess spread (%) SDR ('AAA') (%) Covenanted WA portfolio recovery ('AAA') (%) Obligor diversity measure (%)** *Three-month average comprises our rated deals. Total debt/equity. Spread over EURIBOR for all classes, excluding the subordinated notes (if there is a fixed-rate tranche, EURIBOR is subtracted from the fixed coupon in the calculation). WAS minus the weighted average cost of debt. **The effective number of obligors in the underlying collateral, obtained by squaring the result for each obligor and taking the reciprocal of the sum of these squares [i.e., 1/sum()^2]. WA Weighted average. WAS Weighted average spread. SDR Scenario default rate. N/A t available. Transaction Timeline Transaction Timeline Expected closing date March 2, 2017 period end date April 15, 2021 Stated maturity date April 15, 2031 te payment frequency Quarterly, beginning April 15, Semiannually after a frequency switch event Participants Collateral manager Arranger Trustee Alcentra Ltd. J.P. Morgan Securities PLC Delaware Trust Company Rationale The preliminary ratings assigned to Jubilee CLO 2013-X's class X, A-R, B-1R, B-2R, C-1R, C-2R, D-R, E-R, and F notes reflect our assessment of: The diversified collateral pool, which will consist primarily of broadly syndicated speculative-grade senior secured term loans and bonds that are governed by collateral quality tests. The credit enhancement provided through the subordination of cash flows, excess spread, and overcollateralization. The collateral manager's experienced team, which can affect the performance of the rated notes through collateral selection, ongoing portfolio management, and trading. The transaction's legal structure, which is expected to be bankruptcy remote. JANUARY 30,

4 Under the transaction documents, the rated notes will pay interest quarterly unless there is a frequency switch event. Following such an event, the notes will switch to semiannual payments. The EURIBOR index on the class B-2R and C-2R notes will not be floored to zero for the first two years. The transaction will have a four-year reinvestment period. At closing, the portfolio will represent a well-diversified pool of corporate credits. 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 Aug. 8, 2016). Our preliminary ratings reflect our assessment of the collateral portfolio's credit quality and the available credit enhancement for the rated notes through the subordination of payable cash flows. In our cash flow analysis, we used the 391 million target par amount, the covenanted weighted-average spread (4.0%), the covenanted weighted-average coupon (5.50%), and the covenanted 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. The Bank of New York Mellon will be the bank account provider and custodian. The portfolio can comprise a maximum of 30% non-euro-denominated obligations, subject to an asset swap provided by hedge counterparty. The participants' downgrade remedies are expected to be in line with our current counterparty criteria (see "Counterparty Risk Framework Methodology And Assumptions," published on June 25, 2013). The transaction's legal structure is expected to be bankruptcy remote, in line with our European legal criteria. Following the application of our structured finance ratings above the sovereign criteria, we consider the transaction's exposure to country risk to be limited at the assigned preliminary rating levels, as the exposure to individual sovereigns does not exceed the diversification thresholds outlined in our criteria (see "Ratings Above The Sovereign - Structured Finance: Methodology And Assumptions," published on Aug. 8, 2016). 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. Rating Considerations In our analysis, we considered the factors in table 1, among others. Table 1 Rating Considerations Risk Risk description Mitigating factors Reduction in cash flow Defaults, adverse interest rate movements, and low recoveries can reduce the cash flow generated by the underlying portfolio and affect the issuer's ability to meet its obligations in a timely manner. S&P Global Ratings' quantitative analysis simulates various default patterns and interest rate movements, under various stress scenarios taking into account portfolio characteristics, payment mechanics, covenants, collateral quality tests, and excess spread. JANUARY 30,

5 Table 1 Rating Considerations (cont.) Risk Risk description Mitigating factors Excess concentration in certain types of collateral obligations Collateral manager trading performance Divergence of effective date portfolio from preliminary assumptions Exposure to covenant-lite loans Long-dated collateral obligation can introduce market value risk The collateral manager's ability to invest in certain types of collateral is outlined by the indenture. Larger concentrations in certain obligations can introduce additional risks to the rated notes. During the reinvestment period, the collateral manager can change the underlying portfolio's composition, thus exposing the transaction to potential deterioration in credit enhancement. Most underlying portfolios are not fully purchased by closing. Therefore, there is a risk that the fully ramped-up portfolio at the transaction's effective date will be materially different than the one presented to S&P Global Ratings for its preliminary analysis. The collateral manager can purchase covenant-lite loans (those that do not contain incurrence or maintenance covenants for the benefit of the lending party) for up to a certain percentage of the underlying portfolio (see table 11). Exposure to these types of loans may reduce the transaction's recovery prospects. A portfolio containing long-dated collateral obligations exposes a transaction to market value risk. To repay the noteholders at the transaction's maturity, the collateral manager will be forced to sell such obligations at the prevailing market price, which may be below par. S&P Global Ratings' cash flow analysis assumes the underlying portfolio contains the maximum allowable amount of certain types of collateral obligations to stress test the transaction for concentration risk. Examples include: 5% fixed rate assets and 0% current pay assets. For more detail, please see table 11. The indenture requires that each additional purchase satisfy, maintain, or certain additional collateral quality tests. For more detail, please see tables 12 and 13. S&P Global Ratings offers collateral managers both a model and formula-based version of its CDO Monitor at closing. This tool is intended to assist the collateral manager in maintaining a similar credit risk and cash flow profile to what was initially presented for our preliminary analysis. For covenant-lite loans that do not have an asset-specific recovery rating, we apply reduced recovery rates in our cash flow analysis (41% under an 'AAA' level of stress versus 50% for a senior secured first-lien loan that is not covenant-lite (in a group "A" country). According to the transaction documents, the collateral manager cannot purchase any long-dated collateral obligations, nor vote in favor of any waiver, modification, or amendment that would extend a collateral obligation's maturity beyond the notes' stated maturity. The weighted average life test must be satisfied following any maturity amendment. Collateral Manager Alcentra is an indirect subsidiary of BNY Alcentra Group Holdings Inc. and part of BNY Mellon Asset Management. As of Aug. 31, 2016 Alcentra's investment management and advisory subsidiaries have approximately $28.7 billion of assets under management (including approximately $13.6 billion in United States assets and $15.1 billion in European assets) across over 80 funds and accounts, including CLOs, direct lending, mezzanine debt funds, managed accounts and open-ended funds in both U.S. dollars and euros with over 300 investors in 30 countries. Quantitative Analysis In analyzing this transaction, S&P Global Ratings conducted a quantitative review consisting of two analyses: a portfolio analysis and a cash flow analysis. Portfolio analysis For the portfolio analysis, S&P Global Ratings ran the portfolio presented to us through the CDO Evaluator model, which defaults portions of the underlying collateral based on the default probability and correlation assumptions defined in our criteria for corporate cash flow collateralized debt obligations. This resulted in a set of scenario default rates (SDRs), which represent expected default levels for the portfolio under the different stress scenarios associated JANUARY 30,

6 with each rating level (see chart 1). For example, the 'AAA' stress scenario assumes an extreme level of stress, one similar to what was experienced during the Great Depression, while the 'BBB' stress scenario assumes a high, but less severe, level of stress that is more akin to the most recent recession. As a result, the portfolio will experience a higher level of defaults in the 'AAA' stress scenario than the 'BBB' stress scenario. Cash flow analysis For the cash flow analysis, we input the transaction-specific structural features presented to us into Standard & Poor's Cash Flow Evaluator model to generate a base-case set of cash flows. We then subjected these cash flows to various default timing and interest rate stress scenarios to arrive at a break-even default rate (BDR) for each rated class of notes (see chart 2). JANUARY 30,

7 For each class, the BDR represents the maximum amount of defaults that it can withstand while still being able to pay timely interest and ultimate principal to its noteholders. Classes with higher subordination typically have higher BDRs. Connecting the portfolio and cash flow analyses For a tranche to achieve a particular rating it must be able to withstand the level of defaults projected by the CDO Evaluator and still pay timely interest and principal (see chart 3). JANUARY 30,

8 The results shown in table 2 indicate that the rated notes have sufficient credit enhancement to withstand our projected default levels. Table 2 Credit Enhancement Class Subordination (%) BDR (%) SDR (%) BDR cushion (%) A-R X B-1R B-2R C-1R C-2R D-R E-R F BDR Break-even default rate. SDR Scenario default rate. BDR cushion--bdr-sdr. Supplemental tests We also conduct a largest-industry default test, a largest-obligor default test, and a largest sovereign default test according to "Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs," published on Aug. 8, 2016, and "Ratings Above The Sovereign - Structured Finance: Methodology And Assumptions," published on Aug. 8, Under these assumptions, the notes can withstand the loss amounts indicated in table 3 at their preliminary rating levels Table 3 Supplemental Tests Class Preliminary rating Preliminary amount (mil. ) Largest industry default test loss amount (mil. ) Largest obligor default test loss amount (mil. ) Largest sovereign test amount (mil. ) Largest sovereign T&C test amount (mil. ) A-R AAA (sf) X AAA (sf) B-1R AA (sf) B-2R AA (sf) C-1R A (sf) C-2R A (sf) D-R BBB (sf) E-R BB (sf) F B- (sf) N/A t applicable. T&C Transfer and convertibility. Sensitivity analysis Finally, several of the assumptions specified in the collateralized debt obligation criteria are stressed to evaluate the sensitivity of the transaction's performance to those parameters. Such stresses include: A negative 10% adjustment to the proposed collateral pool's recovery rates relative to each tranche's JANUARY 30,

9 weighted-average recovery rate. Intra- and inter-industry correlation adjustments as described in table 4. Table 4 Correlation Scenario Within industry (%) Between industries (%) Below base case Base case equals preliminary rating Above base case Table 5 illustrates the rating migration that would occur under each of the aforementioned scenarios. Table 5 Sensitivity Analysis Rating Migration Resulting rating transition Class Preliminary rating 10% recovery decrease Correlation above base case A-R AAA (sf) AA+ (sf) AA+ (sf) X AAA (sf) AAA (sf) AAA (sf) B-1R AA (sf) AA- (sf) AA- (sf) B-2R AA (sf) AA- (sf) AA- (sf) C-1R A (sf) A- (sf) A- (sf) C-2R A (sf) A- (sf) A- (sf) D-R BBB (sf) BBB- (sf) BBB- (sf) E-R BB (sf) B+ (sf) BB (sf) F B- (sf) CCC+ (sf) B- (sf) Collateral Quality Tests And Credit Metrics In addition to the quantitative framework, we produce and review other metrics to assess specific risks inherent in a transaction. Results for the collateral quality tests based on the portfolio provided to us are shown in table 6. Table 6 Collateral Quality Metrics Performing Collateral Test Weighted average Covenant Margin Weighted average life (years) Weighted average spread including floors (%) Weighted average EURIBOR floor (%) Weighted average fixed coupon (%)* *Calculated value does not give credit to excess spread, which may positively adjust the calculation when determining compliance with the covenant. N/A t applicable. EURIBOR Euro Interbank Offered Rate. JANUARY 30,

10 Portfolio Characteristics Metrics based on the portfolio presented to S&P Global Ratings are shown in table 7. Table 7 Target Collateral Obligations Target par balance (mil. ) 391 Par balance of identified collateral (mil. ) Par balance of collateral not yet identified (mil. ) 51.2 S&P Global Ratings' credit rating (% of identified collateral) 86.9 S&P Global Ratings' implied rating (% of identified collateral) 13.1 Obligors. of identified obligors 97 Avg. obligor holding (%) 4 Largest-obligor holding (%) 2.94 Smallest-obligor holding (%) 0.15 In the portfolio data referenced for this analysis, the issuer had identified approximately 86.9% of the portfolio's collateral. As the portfolio composition changes, the information and results presented in table 8 and charts 4-7 are also likely to change. Obligor concentration The underlying portfolio presented to S&P Global Ratings for its rating analysis consists of obligors in the industries shown in table 8. Table 8 Top Obligor Holdings As Of Dec. 7, 2016 tional amount (mil. ) tional amount (%) Obligor reference Industry S&P Global Ratings' credit rating Obligor Cumulative Obligor Cumulative 1 Media BB Software B Media B Chemicals B Diversified telecommunication services B Containers and packaging B Chemicals BB Healthcare providers and services B Diversified telecommunication services B Commercial services and supplies BB JANUARY 30,

11 Industry distribution Chart 4 shows the industry distribution in the portfolio. Chart 4 Ratings distribution Chart 5 shows the ratings distribution in the portfolio. JANUARY 30,

12 Chart 5 Recovery rating distribution Table 9 and chart 6 below presents a summary of the portfolio S&P Global Ratings' loan recovery rates. Table 9 Performing Identified Collateral WARR Liability rating WARR (%) Modeled WARR (%) AAA (sf) AA (sf) A (sf) BBB (sf) BB (sf) B (sf) WARR Weighted average recovery rate. JANUARY 30,

13 Chart 6 If the collateral manager cannot acquire the remaining portfolio that has characteristics similar to the unidentified collateral in the target portfolio, the BDRs may decrease and the cushion outlined in the preliminary ratings table the difference between the BDRs and the SDRs could be diminished. If this difference becomes negative, we may not affirm the ratings on the ramp-up end date. Maturity distribution Chart 7 shows the maturity distribution in the portfolio. JANUARY 30,

14 Chart 7 Portfolio Investment Guidelines The underlying portfolio will consist primarily of euro denominated senior secured loans and bonds to broadly syndicated corporate borrowers. The collateral portfolio's effective date and reinvestment guidelines are expected to comply with the limitations shown in table 10. Table 10 Collateral Pool Guidelines Type of obligation Limit (%) Other than senior secured loans, senior secured bonds, cash, and eligible investments 10 Unsecured senior obligations, second-lien loans, mezzanine obligations, and high-yield bonds: aggregate/single obligor 10.0/2.5 Senior secured loans and senior secured bonds: single obligor/up to five/largest 2.5/3.0/3.25 Current-pay obligations 0 Fixed-rate collateral obligations 5 Covenant-lite loans 35 JANUARY 30,

15 Table 10 Collateral Pool Guidelines (cont.) Type of obligation Participation interests and subject to securities lending agreements: aggregate/counterparties rated 'AAA' individually and in aggregate/counterparties rated in the 'AA' category individually and in aggregate/counterparties rated 'A+' individually and in aggregate/counterparties rated 'A' individually and in aggregate/counterparties rated less than 'A' Limit (%) 20.0/20.0/10.0/5.0/5.0/0.0 Corporate rescue loans: aggregate/individual 5.0/2.0 S&P Global Ratings industry classification group: individual/up to two/largest 10.0/12.0/15.0 S&P Global Ratings rating of 'CCC+' or below 7.5 Annual obligations 0 Paid-in-kind securities 5 Rating derived from another rating agency 10 Currency denomination other than euro or a qualifying currency with an asset swap 0 Lease/finance lease/step-up or step-down obligation/margin stock/mature after the stated maturity of the notes/synthetic security/structured finance obligation/prefunded letter of credit/zero coupon bond Domicile of obligors in non-emerging market countries rated below 'A-' by S&P Global Ratings 10 *Covenant-lite loans are assigned lower recovery ratings than similar obligations that require continued compliance with covenants. CLO--Collateralized loan obligation. Qualifying currency: Euro, Sterling, U.S. dollars, Czech koruna, Danish krone, Swedish krone, Canadian dollars, Australian dollars, New Zealand dollars, Swiss francs, Japanese yen, Polish zloty, or any other currency with rating agency confirmation. PIK--Payment in kind. Risk of concentration in certain obligation types S&P Global Ratings considers larger concentrations in the types of obligations shown in table 11 to pose additional risk to the transaction. If the transaction can purchase such collateral obligations, our quantitative analysis would consider the risk associated with such types of obligations (see table 10 above for transaction-specific limitations). Table 11 Risks Of Obligation Types 0 Obligation type Current-pay obligations Deferrable obligations Fixed-rate obligations Long-dated obligations Risk specific to the obligation Our criteria allow transactions to purchase current-pay obligations as long as the collateral manager reasonably believes that the obligor will remain current on all contractual payments (as well as other factors). Due to the increased risk associated with these obligations, they are carried at 'CCC-' in the portfolio analysis, which will increase the SDRs produced by CDO Evaluator. The current pay allowance for this transaction is 0%. Obligations where interest payments may be deferred can result in a discrepancy in the timing of cash inflows and outflows. If this mismatch is significant, it may result in a shortfall in cash available to pay the rated noteholders. Unless the transaction can only purchase permitted deferrable obligations, we conduct our cash flow analysis assuming that the transaction holds the maximum amount of deferrable obligations allowed. The timing differences will be captured in the BDRs generated by Cash Flow Evaluator. There is a 5.0% allowance for deferrable obligations in this transaction as the manager can purchase PIK assets, which are defined as assets that are capable of being deferred. Because interest payments for all of the rated notes are tied to EURIBOR, obligations in the underlying portfolio that pay a fixed rate create exposure to interest rate movements. Should market rates change significantly over the transaction's life, this may reduce excess spread. To account for such risk, we consider the mix of fixed- and floating-rate assets at the minimum and maximum levels. The results are captured in the BDRs generated by Cash Flow Evaluator. Collateral obligations scheduled to mature after the transaction's stated maturity date introduce market value risk, as the collateral manager must sell the obligations at the prevailing market price to pay the rated noteholders. To account for this risk, our cash flow analysis haircuts the par amount of these obligations (10% per year after the transaction's stated maturity), which will lower the BDRs produced by Cash Flow Evaluator. This stress would also be considered for long-dated assets that the transaction can hold after any maturity amendments. JANUARY 30,

16 Table 11 Risks Of Obligation Types (cont.) Obligation type Obligations that pay interest less frequently than quarterly S&P Global Ratings' credit rating of 'CCC+' or below Risk specific to the obligation Because transactions typically require quarterly interest payments to be made to the noteholders, a portfolio consisting of collateral obligations that pay interest less frequently creates a discrepancy in the timing of cash inflows and outflows. If this mismatch is significant, it may result in a shortfall in cash available to pay the rated noteholders. In order to mitigate the effects of these timing mismatches, the transaction incorporates an interest smoothing account and a frequency switch mechanism, which if triggered, will switch the payment frequency on the rated notes to semi-annual. Transaction documents typically limit the amount of obligations rated 'CCC+' or below that the collateral manager can purchase. A higher concentration of obligations rated 'CCC+' or lower will increase the SDRs produced by CDO Evaluator. BDR Break-even default rate. SDR--Scenario default rate. EURIBOR--Euro Interbank Offered Rate. PIK--Payment in kind. Under the transaction documents, certain conditions must be satisfied before collateral is bought for or sold from the portfolio (see tables 12 and 13). Table 12 Summary Of Trading Conditions During Period Conditions to reinvest proceeds from each type of assets sold/received Overcollateralization 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 t less than 100% of the principal balance of asset sold* Credit impared t less than 100% of the sale proceeds of asset sold* N/A Credit d t less than 100% of the principal balance of asset sold* Defaulted (including recovery on defaulted assets) Satisfy t less than 100% of the sale proceeds of asset sold* N/A Unscheduled principal (including recoveries) t less than 100% of the principal balance of asset generating proceeds* Scheduled principal t less than 100% of the principal balance of asset generating proceeds* *Alternatively, if the aggregate collateral balance of the portfolio is greater than the initial par balance, adjusted for amortized note balance and new issuance. N/A--t applicable. JANUARY 30,

17 Table 13 Summary Of Trading Conditions After Period Conditions to reinvest proceeds from each type of assets sold/received Overcollateralization 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 impared Passing before and after t less than 100% of the sale proceeds of asset sold* t required Yes Yes Credit d Passing before and after t less than 100% of the principal balance of asset sold* t required Yes Yes Defaulted (including recovery on defaulted assets) not allowed Unscheduled principal Passing before and after t less than 100% of the principal balance of asset generating unscheduled principal proceeds* t required Yes Yes Scheduled principal not allowed *Alternatively, if the aggregate collateral balance of the portfolio is greater than the initial par balance. Alternatively if scenario default rates are maintained or d. te Payment Considerations Overcollateralization, interest coverage, and interest diversion tests The rated notes benefit from certain structural features that require sequential mandatory redemption upon a breach of any overcollateralization or interest coverage test. Additionally, during the reinvestment period, the rated notes benefit from the reinvestment of up to a certain amount of the excess interest proceeds, captured upon breach of the transaction's interest diversion test (see table 14). Table 14 Overcollateralization, Interest Coverage, And Interest Diversion Tests Class Min. O/C required (%) Min. I/C required (%) A/B C D E F* JANUARY 30,

18 Table 14 Overcollateralization, Interest Coverage, And Interest Diversion Tests (cont.) Class Min. O/C required (%) Min. I/C required (%) Interest diversion test (i)the interest diversion test will be satisfied when the class F O/C test is equal to or higher than the specified level.*class F OC test is applicable after the reinvestment period only. O/C--Overcollateralization. I/C--Interest coverage. N/A--t applicable. Payment priorities Under the transaction documents, the collateral's interest and principal collections are payable according to separate payment priorities. On each payment date during and after the reinvestment period, unless at the stated maturity or an acceleration following an event of default occurs, proceeds will be distributed in the priority outlined in table 15 and 16. Table 15 Interest Waterfall (During And After The Period) Unless There Is An Acceleration Event Following An Event Of Default Priority A B C D E F G H I J K L M N O P Q R S T U V W Payment Taxes. 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, unless deferred at the collateral manager's option and used to either purchase collateral or pay amounts below, and then unpaid deferred senior fee unless voluntarily deferred. Hedge counterparty payments, other than subordinated hedge termination payments and termination payments to the securities lending counterparties. Class X interest, scheduled principal, unpaid principal, and class A interest. Class B interest. Class A/B coverage tests; if they fail, pay principal on the class A and B notes according to the note payment sequence until cured.* Class C interest, including interest on deferred interest, but excluding deferred interest. Class C coverage tests; if they fail, pay principal on the notes according to the note payment sequence until cured.* Class C deferred interest. Class D interest, including interest on deferred interest, but excluding deferred interest. Class D coverage tests; if they fail, pay principal on the notes according to the note payment sequence until cured.* Class D deferred interest. Class E interest, including interest on deferred interest, but excluding deferred interest. Class E coverage tests; if they fail, pay principal on the notes according to the note payment sequence until cured.* Class E deferred interest. Class F interest, including interest on deferred interest, but excluding deferred interest. Class F coverage tests; if they fail (after the reinvestment period), pay principal on the notes according to the note payment sequence until cured.* Class F deferred interest. During the reinvestment period, the reinvestment diversion test; if they fail, use up to 50% of the remaining interest proceeds and the amount necessary to cure to purchase collateral obligations. Uncapped trustee fees and expenses. JANUARY 30,

19 Table 15 Interest Waterfall (During And After The Period) Unless There Is An Acceleration Event Following An Event Of Default (cont.) Priority X Y Z AA BB Payment Uncapped administrative expenses. Subordinated management fee, unless deferred at the collateral manager's option and used to purchase collateral or pay amounts below, and then unpaid deferred subordinated management fee unless voluntarily deferred, and then all other deferred senior and subordinated management fees. Hedge termination payments and amounts owed to securities lending counterparties that remain unpaid, pro rata. During the reinvestment period, any collateral enhancement amounts to the collateral enhancement account. Collateral manager incentive fee and any amounts remaining to the subordinated noteholders. *te payment sequence: the class X and A notes' principal and interest until fully paid; then the class B notes' principal and interest until fully paid; then the class C notes' principal, interest, and deferred interest, until fully paid; then the class D notes' principal, interest, and deferred interest, until fully paid; then the class E notes' principal, interest, and deferred interest, until fully paid; then the class F notes' principal, interest, and deferred interest, until fully paid. Table 16 Principal Waterfall (During And After The Period) Unless There Is An Acceleration Event Following An Event Of Default Priority Payment A If unpaid in the interest waterfall, items A-H of table 15. B C D E F G H I J K L M N O P Class A/B coverage tests; if they fail, pay principal on the class A and B notes according to the note payment sequence until cured.* Class C coverage tests; if they fail, pay principal on the notes according to the note payment sequence until cured.* Class D coverage tests; if they fail, pay principal on the notes according to the note payment sequence until cured.* Class E coverage tests; if they fail, pay principal on the notes according to the note payment sequence until cured.* Class F coverage tests following the expiry of the reinvestment period; if hey fail, pay principal on the notes according to the note payment sequence until cured.* If unpaid in the interest waterfall, item J of table 15, but only if the par value test will be satisfied pro forma. If unpaid in the interest waterfall, item L of table 15, but only if the par value test will be satisfied pro forma. If unpaid in the interest waterfall, item M of table 15, but only if the par value test will be satisfied pro forma. If unpaid in the interest waterfall, item O of table 15, but only if the par value test will be satisfied pro forma. If unpaid in the interest waterfall, item P of table 15, but only if the par value test will be satisfied pro forma. If unpaid in the interest waterfall, item R of table 15, but only if the par value test will be satisfied pro forma. If unpaid in the interest waterfall, item S of table 15, but only if the par value test will be satisfied pro forma. If unpaid in the interest waterfall, item U of table 15, but only if the par value test will be satisfied pro forma. If a special redemption, pay principal on each class of notes according to the principal payment sequence.* During the reinvestment period, purchase collateral obligations; after the reinvestment period, reinvest unscheduled principal payments or proceeds from credit risk or d sales. JANUARY 30,

20 Table 16 Principal Waterfall (During And After The Period) Unless There Is An Acceleration Event Following An Event Of Default (cont.) Priority Q R S Payment After the reinvestment period, pay the notes according to the note payment sequence.* If unpaid in the interest waterfall, items W-Z of table 15, sequentially. Junior management fee and remaining distributions to the subordinate noteholders. *te payment sequence: class A notes' principal and interest until fully paid; then class B notes' principal and interest until fully paid; then class C notes' principal, interest, and deferred interest, until fully paid; then class D notes' principal, interest, and deferred interest, until fully paid; then class E notes' principal, interest, and deferred interest, until fully paid. te Redemption Optional redemption After the noncall period, all classes of notes may be redeemed, in whole but not in part, on any day at the direction of the holders of more than 50% of the subordinated notes' principal 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 will use the available principal and interest proceeds to redeem the notes according to the priority of payments outlined in tables 15 and 16. The class X tes will be subject to mandatory redemption in part on each of the first four payment dates immediately following the closing date. Tax redemption If a tax event occurs, any class of notes may be redeemed, in whole but not in part, before their legal final maturity dates on any payment date at the direction of the holders of more than 50% of the subordinated notes' principal amount. Partial redemption by refinancing After the noncall period, the notes may be redeemed by class, in whole but not in part, from the refinancing proceeds on any payment date at the direction of more than 50% of the aggregate outstanding amount of the subordinated notes. The issuer may refinance subject to the following: The issuer has notified S&P Global Ratings. The refinancing proceeds and excess interest proceeds will be at least sufficient to pay the redemption price of the class or classes of secured notes subject to refinancing plus expenses. The aggregate principal amount of any obligations providing the refinancing is equal to the aggregate outstanding amount of the securities being redeemed with the proceeds of such obligations. The stated maturity of each class of obligations providing the refinancing is the same as the stated maturity of each class of securities being refinanced. The refinancing proceeds will be used (to the extent necessary) to redeem the applicable notes. The agreements relating to the refinancing contain limited recourse and nonpetition provisions equivalent to those applicable to the secured notes being redeemed. The obligations providing the refinancing are subject to the payment priority and are not more senior than the JANUARY 30,

21 securities being refinanced. The rights of the obligations providing the refinancing are the same as the rights of the corresponding class of notes being refinanced. The interest rate of any obligations providing the refinancing will not be greater than the interest rate of the securities subject to the refinancing. Application Of Standard & Poor's CDO Monitor/Compliance With Standard & Poor's CDO Monitor Test Standard & Poor's CDO Monitor is a tool that collateral managers use during the reinvestment period to determine if a particular trade or series of trades increases the risk to the rated liabilities. The CDO Monitor test will be considered passing if the results indicate that the current portfolio produces an SDR that is equal to or below the transaction's BDR. There is no requirement that the CDO Monitor test be considered after the reinvestment period, or when reinvesting proceeds from the sale of a credit risk or defaulted obligation. 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: A failure to pay interest, when due and payable, to the class X, A-R or B-1R, and B-2R notes (each within the related 10-day grace period). Additionally, failure to pay interest on the class C-1R, C-2R, D-R, E-R, or F notes if they are the controlling class. A failure to pay principal payment or the redemption price on any rated note when due and payable at the stated maturity date or any redemption date (each within the related five-day grace period). The issuer fails to disburse amounts above 1,000 in accordance with the priority of payments within a 10-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 haircuts, but includes defaulted assets carried at their market value. Under the transaction documents, the issuer is required to register as an investment company under the Investment Company Act of This requirement will be in effect for 45 days. A material default in the performance or material breach of any covenant, or other issuer agreement that is not cured within the 45-day cure period. It becomes unlawful for the issuer to perform or comply with any one or more of its obligations under the notes. After enforcement event has occurred On each distribution date after an acceleration following an event of default, interest collections and principal proceeds will be distributed in the order of post enforcement priority of payments. JANUARY 30,

22 Surveillance S&P Global Ratings will maintain active surveillance on the rated notes until the notes mature or are retired, or until S&P Global Ratings' credit ratings on the transaction have been withdrawn. 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 S&P Global Ratings to maintain continuous surveillance on the rated notes. Related Criteria And Research Related Criteria Criteria - Structured Finance - CDOs: Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs, Aug. 08, 2016 Criteria - Structured Finance - General: Ratings Above The Sovereign - Structured Finance: Methodology And Assumptions, Aug. 08, 2016 Criteria - Structured Finance - General: Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 09, 2014 General Criteria: Methodology: Timeliness Of Payments: Grace Periods, Guarantees, And Use Of 'D' And 'SD' Ratings, Oct. 24, 2013 Legal Criteria: Europe Asset Isolation And Special-Purpose Entity Criteria--Structured Finance, Sept. 13, 2013 Criteria - Structured Finance - General: Counterparty Risk Framework Methodology And Assumptions, June 25, 2013 General Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012 Criteria - Structured Finance - CDOs: Qualification And Treatment Of Current-Pay Obligations In Global Cash Flow CLOs, July 11, 2007 Related Research 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 European Economic Snapshots For 4Q16 Published, Dec. 8, EMEA Structured Credit Scenario And Sensitivity Analysis, Aug. 6, 2015 Analytical Team Primary Credit Analyst: Abhijit A Pawar, London (44) ; abhijit.pawar@spglobal.com Secondary Contacts: Gabriella Vicko, London ; gabriella.vicko@spglobal.com Emanuele Tamburrano, London (44) ; emanuele.tamburrano@spglobal.com JANUARY 30,

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