Great Lakes CLO Ltd./Great Lakes CLO LLC

Transcription

1 Presale: Great Lakes CLO Ltd./Great Lakes CLO LLC Primary Credit Analyst: Timothy J Walsh, New York (1) ; timothy.walsh@standardandpoors.com Secondary Contact: Kyle S Rose, New York (1) ; kyle.rose@standardandpoors.com Analytical Manager, U.S. Structured Credit New Issuance: Winston W Chang, New York (1) ; winston.chang@standardandpoors.com Table Of Contents $ Million Floating-Rate Debt Rationale Rating Considerations Portfolio Analysis Top Obligor Holdings Industry Distribution Rating Distribution Maturity Distribution Spread Distribution Recovery Rate Distribution Sensitivity Analysis MARCH 28,

2 Table Of Contents (cont.) Structural Overview Collateral Pool Guidelines Overcollateralization, Interest Coverage, And Reinvestment Diversion Tests Events Of Default Payment Priorities Asset Manager Reinvestment Debt Redemption Surveillance Standard & Poor's 17g-7 Disclosure Reports Related Criteria And Research Appendix: Other Defined Terms MARCH 28,

3 Presale: Great Lakes CLO Ltd./Great Lakes CLO LLC $ Million Floating-Rate Debt This presale report is based on information as of March 28, 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. Standard & Poor's Ratings Services' portfolio analysis for this transaction is based on the asset manager's decision to manage this transaction to maintain the portfolio collateral's original credit quality. This analysis generally reflects the application of our criteria to a combination of purchased collateral, collateral committed to be purchased, and the indicative portfolio of assets provided to us by the asset manager, and may also reflect our assumptions about the transaction's investment guidelines. The results from Standard & Poor's CDO Evaluator, cash flow model, and sensitivity analysis take into account the above mentioned portfolio along with the additional assumptions or stresses that form the basis for the assigned preliminary ratings. Preliminary Ratings As Of March 28, 2014 Class Preliminary rating(i) Preliminary amount (mil. $) Interest rate (%) Subordination (%) A AAA (sf) Three-month LIBOR plus 1.90% A loans(ii) AAA (sf) Three-month LIBOR plus 1.90% B NR Three-month LIBOR plus 2.65% C (deferrable) NR Three-month LIBOR plus 3.75% D (deferrable) NR Three-month LIBOR plus 4.25% E (deferrable) NR Three-month LIBOR plus 5.25% F (deferrable) NR Three-month LIBOR plus 6.00% Subordinated notes SDR (%) BDR (%) BDR cushion (%) N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A NR N/A N/A N/A N/A N/A (i)the rating on each class of securities is preliminary and subject to change at any time. (ii)according to the class A loan agreement, we expect the issuers will borrow $15 million in aggregate principal from the class A lenders on the closing date. We expect the aggregate amount of issuance on the class A debt to be $197.5 million. SDR--Scenario default rate. BDR--Break-even default rate. NR--t rated. N/A--t applicable. MARCH 28,

4 Supplemental Tests As Of March 28, 2014 Overcollateralization (mil. $) Class Preliminary rating Preliminary amount (mil. $) Target portfolio Largest industry default test Largest obligor default test A AAA (sf) A loans AAA (sf) NR--t rated. N/A--t applicable. Transaction Profile Expected closing date April Effective date December Reinvestment period end date April ncall period end date April Stated maturity date April Total preliminary rated amount $ million. Total debt balance (including the subordinated notes) $ million. Collateral A revolving pool consisting of senior secured loans to middle-market obligors. Structure type A cash flow CLO consisting of middle-market loans. Structure purpose Arbitrage. Management An actively managed portfolio. Debt payment frequency Quarterly, beginning July Issuer Great Lakes CLO Ltd. Co-issuer Great Lakes CLO LLC. Arrangers Deutsche Bank Securities Inc. and BMO Capital Markets GKST Inc. Trustee U.S. Bank N.A. Hedge counterparty ne. CLO--Collateralized loan obligation. Asset Manager Asset manager. of Standard & Poor's-rated U.S. CLOs managed(i) Standard & Poor's-rated U.S. CLO assets under management(i) BMO Asset Management Corp. One. $0.35 billion(i). (i)as of December CLOs--Collateralized loan obligations. Portfolio Information As Of March 28, 2014 Target assets (mil. $) Target par balance Par balance of identified collateral Par balance of collateral not yet identified Eligible investments N/A Standard & Poor's rating (% of identified collateral) Standard & Poor's implied rating (% of identified collateral) MARCH 28,

5 Portfolio Information As Of March 28, 2014 (cont.) Obligors acquired. of obligors 63 Avg. obligor holding (%) 1.59 Largest-obligor holding (%) 2.14 Smallest-obligor holding (%) 1.08 Benchmark statistics Maximum weighted avg. maturity (approx. years) 8.0 Portfolio weighted avg. maturity (years) 5.39 Minimum weighted avg. rating N/A Portfolio weighted avg. rating B- Minimum weighted avg. spread (%) 4.55 Portfolio weighted avg. spread (%) 4.60 Portfolio weighted avg. spread, including LIBOR floors (%) 5.09 Standard & Poor's default measure (%) 8.49 N/A--t applicable. Rationale The preliminary ratings assigned to Great Lakes CLO Ltd./Great Lakes CLO LLC's floating-rate debt reflect our assessment of: The credit enhancement provided to the preliminary rated debt through the subordination of cash flows that are payable to the subordinated notes. The transaction's credit enhancement, which is sufficient to withstand the defaults applicable for the supplemental tests (not counting excess spread) and cash flow structure, which can withstand the default rate projected by Standard & Poor's CDO Evaluator model, as assessed by Standard & Poor's using the assumptions and methods outlined in its corporate collateralized debt obligation (CDO) criteria, (see "Update To Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs," published Sept. 17, 2009). The transaction's legal structure, which we expect to be bankruptcy remote. The diversified collateral portfolio, which consists of speculative-grade senior secured term loans to middle-market obligors. The asset manager's experienced management team. The transaction's ability to make timely interest and ultimate principal payments on the preliminary rated debt, which we assessed using our cash flow analysis and assumptions commensurate with the assigned preliminary ratings under various interest rate scenarios, including LIBOR ranging from % %. The transaction's overcollateralization and interest coverage tests, a failure of which will lead to the diversion of interest and principal proceeds to reduce the balance of the rated debt outstanding. The transaction's reinvestment diversion test, a failure of which during the reinvestment period will lead to the reclassification of excess interest proceeds that are available before paying incentive management fees, uncapped administrative expenses, and subordinated note distributions to principal proceeds to purchase additional assets. MARCH 28,

6 Rating Considerations In our analysis, we considered the following factors, among others: The transaction will be exposed to the market value of defaulted assets and assets rated 'CCC+' or lower. Any defaulted assets in the portfolio will be carried at the lower of their recovery rate or market value in the numerator of the overcollateralization tests, and any assets rated 'CCC+' or lower that exceed 15% of the portfolio's collateral value will be carried at the market value in the numerator of the overcollateralization tests. An event of default will be triggered if the class A debt's overcollateralization ratio falls below 102%. Therefore, the probability that the transaction would trigger this event of default would increase if the portfolio experiences significant credit migration. According to the transaction documents, the event of default overcollateralization ratio is calculated without ratings-based haircuts, but includes defaulted assets carried at their recovery value. In our opinion, the trigger level and the vesting of voting rights for acceleration and liquidation are consistent with Standard & Poor's CDO criteria (see "The Use Of Rating-Based Haircuts In Event Of Default Overcollateralization Tests For CDOs," published March 19, 2008). The asset manager can enter into trading plans to satisfy the reinvestment guidelines, even though a single trade that is part of such trading plan may not independently satisfy all of the reinvestment guidelines. However, according to the transaction documents, the asset manager may enter into only one trading plan at a time, each trading plan may not account for more than 5% of the portfolio's collateral amount, each trading plan may not extend beyond a the final date of a due period, and the asset manager's ability to enter into future trading plans will be restricted if any previous trading plan deteriorates the issuer's compliance with any of the reinvestment guidelines. The asset manager may enter into hedging transactions. We expect that the hedge transaction agreements will be structured with counterparty replacement provisions consistent with our global structured finance counterparty criteria (see "Counterparty Risk Framework Methodology And Assumptions," published June 25, 2013). The asset manager cannot purchase any collateral assets that mature beyond the stated maturity date nor vote in favor of any waiver, modification, amendment, or variance that would extend a collateral obligation's maturity beyond the stated maturity date. Also, according to the transaction documents, the weighted average life test will be satisfied after such waiver, modification, amendment, or variance. A collateralized loan obligation (CLO) concentrated in long-dated assets could be exposed to market value risk at maturity because the asset manager may have to sell long-dated assets for less than par to repay the CLO's subordinate rated notes when they mature (see "CDO Spotlight: The Relationship Between Long-Dated Assets And Market Value Risk In U.S. Cash Flow CLOs," published April 26, 2012). The asset manager may reclassify principal proceeds remaining in the ramp-up account as interest proceeds, up to a certain amount, as long as the conditions required for the effective date are met and rating agency confirmation has been obtained. The transaction documents do not allow for reinvestment after the reinvestment period. On any payment date after the non-call period, the issuer may redeem, refinance or re-price any class or classes of debt in whole but not in part, as long as it satisfies certain conditions (see the Debt Redemption section for a list of these conditions). We would expect the outstanding principal amount and any accrued and unpaid interest to be paid to the rated debt being redeemed. MARCH 28,

7 Portfolio Analysis As of March 28, 2014, the issuer had identified approximately 52.37% of the portfolio's collateral, which it is expected to have committed to purchase by the closing date. As the portfolio composition changes, the information and results presented in tables 1-7 and charts 1-5 are also likely to change. Top Obligor Holdings The identified collateral pool presented to Standard & Poor's for its rating analysis comprises obligors in the industries shown in table 1. Table 1 Top Obligor Holdings As Of March 28, 2014 tional amount (mil. $) tional amount (%) Obligor reference Industry Security type 1 Health care Senior secured first-lien 2 Diversified insurance Senior secured first-lien 3 Food service Senior secured first-lien 4 Business equipment and services 5 Business equipment and services Senior secured first-lien Senior secured first-lien 6 Cosmetics/toiletries Senior secured first-lien 7 Automotive Senior secured first-lien 8 Farming/agriculture Senior secured first-lien 9 Drugs Senior secured first-lien 10 Aerospace and defense Senior secured first-lien Standard & Poor s rating Standard & Poor s implied rating CreditWatch/outlook Obligor Cumulative Obligor Cumulative N/A B- N/A N/A B N/A N/A B N/A N/A B N/A CCC- N/A N/A N/A B N/A N/A B N/A CCC- N/A N/A N/A B N/A CCC- N/A N/A N/A--t applicable. MARCH 28,

8 Industry Distribution The acquired collateral pool presented to Standard & Poor's for its rating analysis comprises the industry concentrations shown in chart 1. Chart 1 Rating Distribution The acquired collateral pool presented to Standard & Poor's for its rating analysis comprises the rating distributions shown in chart 2. MARCH 28,

9 Chart 2 Maturity Distribution The acquired collateral pool presented to Standard & Poor's for its rating analysis comprises the maturity distributions shown in chart 3. MARCH 28,

10 Chart 3 Spread Distribution The acquired collateral pool presented to Standard & Poor's for its rating analysis comprises the spread distribution shown in table 2 and chart 4. MARCH 28,

11 Chart 4 Table 2 Performing Acquired Collateral Spread Distribution Actual weighted avg. spread (%) 4.65 Standard deviation of spread (%) 0.46 Minimum weighted avg. spread covenant (%) 4.55 Actual weighted avg. spread, including LIBOR floors (%) 5.58 Actual weighted avg. LIBOR floor (%) 1.19 Recovery Rate Distribution The acquired collateral pool presented to Standard & Poor's for its rating analysis comprises the recovery rate distribution shown in table 3 and the recovery rating distribution shown in chart 5. MARCH 28,

12 Chart 5 Table 3 Performing Acquired Collateral Recovery Rate Distribution (Based On % Of Par) Weighted avg. recovery rate AAA (sf) Standard deviation of recovery rate AAA (sf) 3.53 Minimum weighted avg. recovery rate covenant AAA (sf) Sensitivity Analysis Recovery rate sensitivity In addition to our base-case analysis, we generated additional scenarios in which we made positive and negative adjustments (10% each) to the proposed collateral pool's recovery rates relative to each tranche's weighted average recovery rate (see table 4). MARCH 28,

13 Table 4 Recovery Rate Sensitivity As Of March 28, 2014 Class Preliminary rating Resulting rating transition BDR cushion at indicated rating (%) 10% recovery increase 10% recovery decrease Current (based on preliminary rating) 10% recovery increase 10% recovery decrease A AAA (sf) AAA (sf) AA+ (sf) A loans AAA (sf) AAA (sf) AA+ (sf) BDR--Break-even default rate. Correlation sensitivity In addition to our base-case analysis, we generated additional scenarios by adjusting the intra- and inter-industry correlations to assess the proposed portfolio's sensitivity to different correlation assumptions assuming the three correlation scenarios outlined in tables 5 and 6. Table 5 Correlation Scenario Within industry (%) Between industries (%) Below base case Base case equals preliminary rating Above base case Table 6 Correlation Sensitivity As Of March 28, 2014 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 (sf) AAA (sf) AA+(sf) A loans AAA (sf) AAA (sf) AA+(sf) BDR--Break-even default rate. Default biasing To assess whether the proposed portfolio has sufficient diversity, we biased defaults on the assets in the proposed collateral pool with the highest spread and lowest base-case recoveries (see table 7). Table 7 Default Biasing As Of March 28, 2014 Class Preliminary rating Resulting rating transition A AAA (sf) AAA (sf) A loans AAA (sf) AAA (sf) Structural Overview Great Lakes CLO Ltd., the issuer, is a special-purpose entity (SPE) that was incorporated as an exempted company with limited liability under the laws of the Cayman Islands. Great Lakes CLO LLC, the co-issuer, is a MARCH 28,

14 corporation organized under the laws of the state of Delaware. The issuer's and co-issuer's only purposes are to acquire the collateral portfolio, issue the debt, enter into transaction documents, and engage in certain related transactions. Standard & Poor's expects the issuer's SPE provisions to be consistent with its bankruptcy-remoteness criteria. In rating this transaction, Standard & Poor's will review the legal matters that it believes are relevant to its analysis, as outlined in its criteria. Collateral Pool Guidelines Standard & Poor's expects the collateral pool to consist of U.S. dollar-denominated senior secured loans to middle-market corporate borrowers. On the closing date, we expect that the issuer will have purchased or committed to purchase approximately 65.0% (in par amount) of the target portfolio and will purchase the remaining collateral by the effective date. We expect the collateral portfolio's effective date and reinvestment guidelines will comply with the limitations shown in table 8. Table 8 Collateral Pool Guidelines Type of obligation Limit (max. % of collateral pool) Other than senior secured loans and eligible investments 0.0 Fixed-rate obligations 0.0 Obligor (and affiliates): single 2.5 Standard & Poor's industry: single/up to two additional 12.0/15.0 Obligor location Canada 10.0 Tax-advantaged jurisdiction 7.5 Obligations with a Standard & Poor's rating of 'CCC+' or below 15.0 Obligations with a rating implied from another agency's rating 10.0 Current-pay obligations (ineligible for purchase) 5.0 Underlying assets with attached equity securities 5.0 First-lien last-out loans, zero-coupon bonds, high-yield bonds, covenant-lite loans, current-pay obligations, debtor-in-possession loans, revolving credit obligations, delayed-draw loans, second-lien loans, senior secured bonds, participations, senior unsecured loans, bridge loans, equity securities, deferred interest assets, PIK securities or partial PIK securities, synthetic securities, structured finance securities, step-up obligations, step-down obligations, synthetic letter-of-credit obligations, and securities that mature after the stated maturity of the debt Tax-advantaged jurisdictions: the Cayman Islands, Bermuda, Curacao, St. Maarten, the Channel Islands, or the Bahamas. PIK--Payment-in-kind. 0.0 Overcollateralization, Interest Coverage, And Reinvestment Diversion Tests In our view, the transaction benefits from certain structural features that require sequential mandatory redemption of the preliminary rated debt (or the purchase of additional collateral obligations, in the case of the reinvestment diversion test during the reinvestment period) upon a breach of any overcollateralization or interest coverage test (see table 9). MARCH 28,

15 Table 9 Overcollateralization, Interest Coverage, And Reinvestment Diversion Tests Class Min. O/C required (%) Min. I/C required (%) A/B C D E F Reinvestment diversion O/C test(i) N/A (i)the reinvestment diversion O/C test will be satisfied when the class F O/C ratio is at least the threshold described above. O/C- Overcollateralization. I/C- Interest coverage test. N/A--t applicable. Events Of Default Under certain conditions, the following events of default may result in the acceleration of payments to the preliminary rated debt or in the collateral's liquidation: The issuer fails to pay interest when due and payable to the class A debt and class B notes, or if the class B notes are no longer outstanding, to the senior-most notes outstanding when due and payable (each within the related five-day grace period). The issuer fails to pay principal on any rated debt when due and payable at the stated maturity or any redemption date. The class A overcollateralization ratio falls below 102%. As defined in the transaction documents, the event of default overcollateralization ratio is calculated without ratings-based haircuts but includes defaulted assets carried at their recovery value. In our opinion, the trigger level and vesting of voting rights for acceleration and liquidation are consistent with Standard & Poor's CDO criteria (see "The Use Of Rating-Based Haircuts In Event Of Default Overcollateralization Tests For CDOs," published March 19, 2008). The issuer, the co-issuer, or the collateral pool becomes an investment company that is required to be registered under the Investment Company Act of Certain covenants under the legal documents are breached and are not cured within the 30-day cure period. The issuer voluntarily or involuntarily enters into bankruptcy. 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, unless there is an acceleration following an event of default or on the final payment date, interest collections will be distributed in the priority outlined in table MARCH 28,

16 Table 10 Interest Waterfall (During And After The Reinvestment Period, Unless There Is An Acceleration Following An Event Of Default Or On The Final Payment Date) Priority Payment 1 Taxes and governmental fees. 2 Capped administrative expenses. 3 The senior management fee plus any that remain due and unpaid from any prior payment date as a result of insufficient funds (plus interest). 4 Class A debt interest. 5 Class B note interest. 6 Class A/B coverage tests. If fail, pay according to the debt payment sequence(i) in each case until the tests are satisfied or the debt is paid in full. 7 Class C note interest (including the interest on the deferred interest) and then class C note deferred interest. 8 Class C coverage tests. If fail, pay according to the debt payment sequence(i) in each case until the tests are satisfied or the debt is paid in full. 9 Class D note interest (including the interest on the deferred interest) and then class D note deferred interest. 10 Class D coverage tests. If fail, pay according to the debt payment sequence(i) in each case until the tests are satisfied or the debt is paid in full. 11 Class E note interest (including the interest on the deferred interest) and then class E note deferred interest. 12 Class E coverage tests. If fail, pay according to the debt payment sequence(i) in each case until the tests are satisfied or the debt is paid in full. 13 Class F note interest (including the interest on the deferred interest) and then class F note deferred interest. 14 Class F coverage tests. If fail, pay according to the debt payment sequence(i) in each case until the tests are satisfied or the debt is paid in full. 15 On the first or second payment dates, if an effective date rating agency confirmation has not been received, all remaining interest proceeds after item 14 will go to the collection account to be applied as interest proceeds on the next payment date. 16 If the effective date rating agency confirmation has not been received, either of the following options at the asset manager's direction: pay to the collection account as principal proceeds to purchase additional collateral, or pay the debt according to the debt payment sequence(i) until effective date rating agency confirmation is received or the rated debt is paid in full. 17 The subordinated management fee plus any that remains due and unpaid from any prior payment date as a result of insufficient funds (plus interest). 18 During the reinvestment period, if a reinvestment diversion O/C ratio fails, deposit as principal proceeds to purchase additional collateral, the lesser of 50% of the remaining interest proceeds, and the amount necessary to satisfy the test. 19 Any deferred senior or subordinated management fees that the asset manager had voluntarily deferred. 20 Any uncapped administrative expenses not paid in item Any remainder to the subordinated noteholders until a 14% internal rate of return is met, and then pay 20% of the remaining proceeds to the asset manager as the incentive management fee. 22 The remainder to the subordinated noteholders. (i)debt payment sequence: Class A debt principal, pro rata, until paid in full, then class B note principal until paid in full, then any accrued and unpaid interest on the class C notes, then any class C deferred interest until paid in full, then class C note principal until paid in full, then any accrued and unpaid interest on the class D notes, then any class D deferred interest until paid in full, then class D note principal until paid in full, then any accrued and unpaid interest on the class E notes, then any class E deferred interest until paid in full, then class E note principal until paid in full, then any accrued and unpaid interest on the class F notes, then any class F deferred interest until paid in full, and then class F note principal until paid in full. On each distribution date during and after the reinvestment period, unless there is an acceleration following an event of default or on the final payment date, principal collections will be distributed in the priority outlined in table MARCH 28,

17 Table 11 Principal Waterfall (During And After The Reinvestment Period, Unless There Is An Acceleration Following An Event Of Default Or On The Final Payment Date) Priority Payment 1 Items 1-5 in the interest waterfall to the extent not paid in full with the interest proceeds. 2 Items 6-16 in the interest waterfall, to the extent not paid in full with the interest proceeds. However, pay item 7 only if the class C notes are the senior-most class outstanding, pay item 9 only if the class D notes are the senior-most class outstanding, pay item 11 only if the class E notes are the senior-most class outstanding, and pay item 13 only if the class F notes are the senior-most class outstanding. 3 On a redemption date, pay the debt according to the debt payment sequence(i) and then pay items 6-9 below (without regard to the reinvestment period). 4 During the reinvestment period, purchase additional collateral, or if the asset manager elects a special amortization, repay the debt principal according to the debt payment sequence(i) and then pay items 6-9 below (without regard to the reinvestment period). 5 After the reinvestment period, pay the debt according to the debt payment sequence(i). 6 After the reinvestment period, pay item 17 of the interest waterfall to the extent not paid in full. 7 After the reinvestment period, pay items 19 and then 20 of the interest waterfall to the extent not paid in full. 8 Any remainder to the subordinated noteholders until a 14% internal rate of return is met, and then pay 20% of the remaining proceeds to the asset manager as the incentive management fee. 9 The remainder to the subordinated noteholders. (i)debt payment sequence: Class A debt, pro rata, until paid in full, then class B note principal until paid in full, then any accrued and unpaid interest on the class C notes, then any class C deferred interest until paid in full, then class C note principal until paid in full, then any accrued and unpaid interest on the class D notes, and then any class D deferred interest until paid in full, then class D note principal until paid in full, then any accrued and unpaid interest on the class E notes, then any class E deferred interest until paid in full, then class E note principal until paid in full, then any accrued and unpaid interest on the class F notes, then any class F deferred interest until paid in full, and then class F note principal until paid in full. After an event of default has occurred or on the stated maturity date On each distribution date, after an acceleration following an event of default, or on the final payment date, interest and principal collections will be distributed in the priority outlined in table 12. Table 12 Interest and Principal Waterfall (If There Is An Acceleration Following An Event Of Default Or On The Final Payment Date) Priority Payment 1 Item 1 of the interest waterfall. 2 Item 2 of the interest waterfall, without regard to any cap. 3 Item 3 of the interest waterfall. 4 Pay the accrued and unpaid interest on the highest ranking class of debt (including deferred interest, if any) until paid in full and then pay the principal of the highest ranking class of debt until paid in full, repeating such process until all rated debt is paid in full. 5 Item 17 of the interest waterfall. 6 Item 19 of the interest waterfall. 7 Accrued and unpaid administrative expenses not paid in item 2 above. 8 Any remainder to the subordinated noteholders until a 14% internal rate of return is met and then pay 20% of the remaining proceeds to the asset manager as the incentive management fee. 9 The remainder to the subordinated noteholders. MARCH 28,

18 Asset Manager BMO Asset Management Corp. (BMO AM) will serve as the asset manager for this transaction. BMO AM is a registered investment adviser and is part of BMO Financial Group, a publicly traded financial services organization with approximately $515.0 billion of assets under management as of Oct. 31, 2013, and 45,500 employees. This transaction will be the second CLO managed by BMO AM; however, the BMO AM team responsible for managing the CLO has previously worked at other organizations where it managed or raised 11 CLOs. Reinvestment Under the transaction documents, certain conditions must be satisfied before collateral is bought for or sold from the portfolio (see table 13). Table 13 Summary Of Trading Conditions During Reinvestment Period Conditions to reinvest proceeds from each type of asset 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 higher rating? New asset with the same or shorter maturity? Discretionary maintain, or, The aggregate principal balance will be maintained or increased maintain, or Credit risk maintain, or, Sale proceeds, the aggregate principal balance will be maintained or increased, or the aggregate collateral principal amount will be greater than the reinvestment target par balance(i). N/A maintain, or Credit d maintain, or, The aggregate principal balance will be maintained or increased, or the aggregate collateral principal amount will be greater than the reinvestment target par balance(i). maintain, or, Defaulted Satisfied Sale proceeds, the aggregate principal balance will be maintained or increased, or the aggregate collateral principal amount will be greater than the reinvestment target par balance(i). N/A maintain, or Equity maintain, or, The aggregate principal balance will be maintained or increased maintain, or, MARCH 28,

19 Table 13 Summary Of Trading Conditions During Reinvestment Period (cont.) Unscheduled principal maintain, or, The aggregate principal balance will be maintained or increased maintain, or, Scheduled principal maintain, or, The aggregate principal balance will be maintained or increased maintain, or, (i)the reinvestment target par balance is $350 million minus the amount of any reduction in the aggregate outstanding amount of the debt plus any principal proceeds that result from additional debt issuances. O/C--Overcollateralization. N/A--t applicable. reinvestments are allowed after the reinvestment period ends. Debt Redemption Optional redemption After the non-call period, the debt may be redeemed on any payment date, in whole but not in part, at the direction of the holders of more than 50% of the subordinated notes. Mandatory redemption If any coverage test is not satisfied, the debt 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 debt according to the priority of payments outlined in tables 10 and 11 until the tests are satisfied. Tax redemption If a tax event occurs, the debt may be redeemed on any payment date, in whole but not in part, before their legal final maturity dates at the direction of the holders of more than 50% of the subordinated notes. Refinancing After the noncall period, the debt may be redeemed by class, in whole but not in part, from refinancing proceeds on any payment date at the direction of the holders of more than 50% of the subordinated notes. The issuer may refinance subject to the following: Standard & Poor's is notified. The refinancing proceeds will be at least sufficient to pay the redemption prices of the class or classes of debt subject to refinancing. The interest rate of any obligations providing the refinancing will not be greater than the interest rate of the debt subject to the refinancing. The stated maturity of each class of obligations providing the refinancing is no earlier than the corresponding stated maturity of each class of debt being refinanced. The obligations providing the refinancing do not rank higher in priority than the corresponding class of debt being refinanced. The refinancing proceeds will be used (to the extent necessary) to redeem the applicable debt. The agreements relating to the refinancing contain limited recourse and non-petition provisions equivalent to those applicable to the debt being redeemed. MARCH 28,

20 The rights of the obligations providing the refinancing are the same as the rights of the corresponding class of debt being refinanced. Expenses incurred from the refinancing have been or will be paid for adequately from the refinancing proceeds. The aggregate principal amount of any obligations providing the refinancing is equal to the aggregate outstanding amount of the debt being redeemed with the proceeds of such obligations. Optional re-pricing On any payment date after the noncall period, at the direction of the holders of more than 50% of the subordinated notes, the issuer will be entitled to reduce the spread over LIBOR applicable to any class of debt. The debt of any non-consenting noteholder will be redeemed at their aggregate outstanding amount plus accrued and unpaid interest. Issuance of additional securities The issuer may issue additional debt to purchase additional securities or redeem debt. The debt issuance will be subject to certain conditions. Surveillance Standard & Poor's will maintain active surveillance on rated CDO debt until they mature or are retired, or until Standard & Poor's ratings on the transaction have been withdrawn. The purpose of rating surveillance is to track whether and how a transaction's credit characteristics change over time compared to our previous expectations, and assess the potential impact on the ratings assigned. If we observe changes in the economy or financial markets that affect the transaction, or changes in the performance of the underlying collateral or credit support, we may convene a rating committee to evaluate the impact of the changes and take rating actions as we deem appropriate. For more information on our CLO surveillance process, please see "CDO Spotlight: Standard & Poor's Surveillance Process For Monitoring U.S. Cash Flow CLO Transactions," published April 14, Standard & Poor's 17g-7 Disclosure Reports SEC Rule 17g-7 requires an NRSRO, for any report accompanying a credit rating relating to an asset-backed security as defined in the Rule, to include a description of the representations, warranties, and enforcement mechanisms available to investors and a description of how they differ from the representation, warranties, and enforcement mechanisms in issuances of similar securities. The Standard & Poor's 17g-7 Disclosure Reports included in this credit rating report are available at Related Criteria And Research Related Criteria Principles For Rating Debt Issues Based On Imputed Promises, Oct. 24, 2013 Counterparty Risk Framework Methodology And Assumptions, June 25, 2013 Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, MARCH 28,

21 Guarantee Criteria--Structured Finance, May 7, 2013 Global CDOs Of Pooled Structured Finance Assets: Methodology And Assumptions, Feb. 21, 2012 Methodology For Analyzing Rating Confirmation Requests To Establish Subsidiary Special-Purpose Entities In CDOs, Dec. 9, 2009 Update To Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs, Sept. 17, 2009 Surveillance Methodology For Global Cash Flow And Hybrid CDOs Subject To Acceleration Or Liquidation After An EOD, Sept. 2, 2009 Methodology For Analyzing Rating Confirmation Requests To Replace Collateral Managers In Global CDOs, Aug. 13, 2009 Revised CDO Current-Pay Criteria Assumptions For Corporate Debt When Issuers Announce A Distressed Exchange Or Buyback, May 18, 2009 The Use Of Rating-Based Haircuts In Event Of Default Overcollateralization Tests For CDOs, March 19, 2008 Qualification And Treatment Of Current-Pay Obligations In Global Cash Flow CLOs, July 11, 2007 Legal Criteria For U.S. Structured Finance Transactions: Special-Purpose Entities, Oct. 1, 2006 CDO Spotlight: General Cash Flow Analytics For CDO Securitizations, Aug. 25, 2004 Structured Finance Criteria Introduced For Cayman Islands Special-Purpose Entities, July 18, 2002 Related Research How Typical CLO Document Provisions Affect Maintenance Of Collateral Characteristics For Managed CLOs, v. 6, 2013 How Deferrable Assets In CLOs Are Treated Under Standard & Poor's Methodology, Oct. 1, 2012 CDO Spotlight: The Relationship Between Long-Dated Assets And Market Value Risk In U.S. Cash Flow CLOs, April 26, 2012 Global Structured Finance Scenario And Sensitivity Analysis: The Effects Of The Top Five Macroeconomic Factors, v. 4, 2011 CDO Spotlight: Standard & Poor's Surveillance Process For Monitoring U.S. Cash Flow CLO Transactions, April 14, 2011 Appendix: Other Defined Terms 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 "Update To Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs," published Sept. 17, 2009, for a 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 (SDR) at the assigned rating for a given class of rated debt. Standard & Poor's rating The Standard & Poor's rating is the public rating, which is typically the issuer credit rating. MARCH 28,

22 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. 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. 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 Standard & Poor's CDO Evaluator. Subordination Subordination is calculated as the debt's total face amount (including the subordinated notes) that have payment priorities subordinate to the assessed class of debt divided by the debt's total face amount (including the subordinated notes). 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. MARCH 28,

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