Black Diamond CLO DAC

Transcription

1 Presale: Black Diamond CLO DAC This presale report is based on information as of Nov. 15, 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 Assigned Class Preliminary rating* Balance (mil.) Subordination (%) Interest rate A-1 AAA (sf) Three/six-month EURIBOR plus 0.86% A-2 AAA (sf) $ Three/six-month U.S. dollar LIBOR plus 1.30% A-3 AAA (sf) Fixed coupon of 1.22% A-4 AAA (sf) $ Fixed coupon of 3.40% B AA (sf) Three/six-month EURIBOR plus 1.40% C A (sf) Three/six-month EURIBOR plus 1.95% D BBB (sf) Three/six-month EURIBOR plus 2.95% E BB (sf) Three/six-month EURIBOR plus 5.10% F B- (sf) Three/six-month EURIBOR plus 6.90% M1 - Subordinated notes NR N/A Excess Primary Credit Analyst: Sandeep Chana, London (44) ; sandeep.chana@spglobal.com Secondary Contacts: Jessy Monnin, London (44) ; jessy.monnin@spglobal.com See complete contact list on last page(s) NOVEMBER 15,

2 Preliminary Ratings Assigned (cont.) Class M2 Subordinated notes Preliminary rating* Balance (mil.) Subordination (%) Interest rate NR $23.60 N/A Excess *The rating on each class of securities is preliminary and subject to change at any time. The preliminary ratings assigned to the class A-1, A-2, A-3, A-4, and B notes address timely interest and ultimate principal payments. The preliminary ratings assigned to the class C, D, E, and F notes address ultimate interest and principal payments. In our analysis, we have assumed a U.S. dollar to Euro rate of 1.18 at closing. The payment frequency switches to semiannual and the index switches to six-month EURIBOR/U.S. dollar LIBOR when a frequency switch event occurs. NR--Not rated. N/A--Not applicable. EURIBOR--Euro Interbank Offered Rate. Executive Summary Black Diamond CLO DAC is a broadly syndicated collateralized loan obligation (CLO) managed by Black Diamond CLO Adviser, LLC (Black Diamond). Black Diamond is a special-purpose management affiliate of Black Diamond Capital Management LLC (BDCM). Based on provisions in the transaction documents: The transaction will be collateralized by at least 90.0% senior secured obligations. Between 15.0% and 20.0% of the assets in the collateral pool can be U.S. dollar-denominated assets. A maximum of 30.0% of the loans in the collateral pool (other than U.S. dollar collateral) can be covenant-lite and 50.0% of the loans in the U.S. dollar-denominated collateral pool can be covenant-lite. A maximum of 2.5% of the loans in the collateral pool can be unhedged collateral obligations (other than U.S. dollar). A maximum of 10% of the assets in the collateral can be fixed rate, provided that fixed-rate collateral obligations denominated in U.S. dollar represent up to 5.0%. The transaction incorporates an interest-smoothing account and a frequency switch mechanism, which, if triggered, permanently switches the payment on the rated notes to semiannual. Transaction Timeline Transaction Timeline Expected closing date Dec. 20, Effective date Approximately six months after closing. Non-call period end date Jan. 20, 2020 period end date Jan. 20, Stated maturity date Jan. 20, Note payment frequency Quarterly, beginning July Semiannually after a frequency switch event. Participants Collateral manager Arranger Trustee Black Diamond CLO Adviser, LLC Natixis S.A. U.S. Bank Trustees Ltd. NOVEMBER 15,

3 Notable Features Foreign exchange risk At closing, the transaction will benefits from a natural foreign exchange hedge since the amount of U.S. dollar-denominated liabilities issued by the class A-2 and A-4 notes at closing will closely match the amount of U.S. dollar-denominated assets. Nevertheless, in accordance with the portfolio profile test limitations described further below, the collateral manager is able to hold between 15% and 20% of U.S. dollar-denominated assets. At the same time, the issuer will use the notes' issuance proceeds at closing to acquire a European-style currency call option with a maturity of five years. This enables the issuer to receive U.S. dollar proceeds at a specified strike price on the exercise date. The collateral manager will exercise the currency call options on the exercise date. The manager may sell the option at any time after rated notes have been fully redeemed or prior to the rated notes being redeemed if the option is sold to redeem all classes of rated notes. In the event of the option being exercised or sold, U.S. dollar-denominated proceeds received will be deposited promptly into the U.S. dollar-denominated principal account to be applied on the next payment date in accordance with the principal waterfall. Key Credit Metrics Selected Credit Metrics Black Diamond CLO Three-Month average* Total leverage (x) Weighted-average cost of debt (Euro tranches) (%) Weighted-average cost of debt (U.S. dollar tranches) (%) Subordination ('AAA') (%) Modelled WAS (%) Modelled WAC (%) Excess spread (%)** SDR ('AAA') (%) Modelled WA recovery ('AAA') (%) *Three-month average comprises our rated deals (final ratings assigned). Total debt/equity. Spread over EURIBOR/U.S dollar LIBOR for all classes, excluding the subordinated notes (if there is a fixed-rate tranche, EURIBOR/U.S. dollar LIBOR is subtracted from the fixed coupon in the calculation). The base case is based on 100% euro floating assets and 5% fixed rate U.S. dollar assets. **Modelled spread minus the weighted-average cost of debt. WA--Weighted-average. WAS--Weighted-average spread. SDR--Scenario default rate. EURIBOR--Euro Interbank Offered Rate. Deal comparison Compared with other broadly syndicated CLOs that S&P Global Ratings assigned final ratings to in the three months ended Aug. 4, 2017, Black Diamond CLO has: Higher total leverage. Higher subordination. A higher weighted-average cost of debt. NOVEMBER 15,

4 A higher modelled weighted-average spread (WAS), and a higher modelled weighted-average coupon (WAC) leading to lower available excess spread. A lower scenario default rate (SDR) and a higher covenanted 'AAA' recovery rate. The class A notes repayment profile Charts 1 and 2 below provide a general repayment profile for the class A notes in our most conservative cash flow scenario under 'AAA' and 'BBB' rating level stresses. Against this profile, the results also illustrate the outcome of the class A/B and F par value ratios over the transaction's life. Chart 1 NOVEMBER 15,

5 Chart 2 Application Of Our CDO Monitor/Compliance With Our CDO Monitor Test Our 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 break-even default rate (BDR). There is no requirement that the CDO Monitor test be considered after the reinvestment period. For this transaction, the non-model version of CDO Monitor will be used initially, with the option to switch to the model version. This non-model version of CDO Monitor is built on the foundation of six portfolio benchmarks, which are used to provide insight into the characteristics that inform the way we assess credit quality. These benchmarks are meant to enhance transparency for investors and other CLO market participants by allowing them to compare metrics across transactions and assess changes within a given CLO over time (for details, see "Standard & Poor's Introduces Non-Model Version Of CDO Monitor," published Dec. 8, 2014). For the purpose of calculating any of the collateral quality tests (including the CDO Monitor test), the issuer in all cases converts any U.S. dollar-denominated proceeds into euro at the initial rate of exchange. NOVEMBER 15,

6 The table below illustrates the benchmarks for Black Diamond CLO CDO Monitor Metrics Black Diamond CLO Expected portfolio default rate (%)* Default rate dispersion (%) 5.59 Obligor diversity measure Industry diversity measure Regional diversity measure** 1.71 Weighted-average life (years) 6.21 *Expected portfolio default rate (EPDR)--The weighted-average portfolio expected default rate expressed as a percentage of the par balance of the assets rated 'CCC-' or higher. Default rate dispersion (DRD)--The weighted-average absolute deviation of the asset default rates from the EPDR. Obligor diversity measure (ODM)--The measure of effective number of obligors in the pool obtained by squaring the result for each obligor and taking the reciprocal of the sum of these squares [i.e., 1/sum()^2]. Industry diversity measure (IDM)--Effective number of industries in the pool obtained in the same way as ODM above. **Regional diversity measure (RDM)--Effective number of regions in the pool obtained the same way as ODM and IDM. Weighted-average life (WAL)--The portfolio's WAL is based on the remaining number of years to maturity for each loan as adjusted for reinvestment. Rationale The preliminary ratings assigned to Black Diamond CLO 's notes reflect our assessment of: The diversified collateral pool, which consists 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. The transaction's counterparty risks. The transaction is a cash flow CLO, securitizing a portfolio of primarily euro- and U.S. dollar-denominated senior secured loans granted to speculative-grade corporates. Black Diamond will manage the transaction. Under the transaction documents, the rated notes will pay quarterly interest unless a frequency switch event occurs. Following this, the notes will permanently switch to semiannual interest payments. The portfolio's reinvestment period will approximately end four years after closing, and the portfolio's maximum average maturity date will be about eight and a half 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 on the effective date will be well-diversified, primarily comprising broadly syndicated speculative-grade senior secured term loans and senior secured bonds. Therefore, we have conducted our credit and cash flow analysis by applying our criteria for corporate cash flow collateralized debt obligations (see "Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs," published on Aug. 8, 2016). In our cash flow analysis, we used the 400 million target par amount, the covenanted weighted-average spread NOVEMBER 15,

7 (3.85%), the covenanted weighted-average coupon (6.00% for euro-denominated assets and 7.00% for U.S. dollar-denominated assets), the covenanted weighted-average recovery rate of 36.00% at the 'AAA' rating level, and the target weighted-average recovery rates at each rating level below 'AAA' as indicated by the manager. We applied various cash flow stress scenarios, using four different default patterns, in conjunction with different interest rate and currency stress scenarios for each liability rating category. We consider that the transaction's documented counterparty replacement and remedy mechanisms adequately mitigate its exposure to counterparty risk under our current counterparty criteria (see "Counterparty Risk Framework Methodology And Assumptions," published on June 25, 2013). 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). Furthermore, asset concentration in a country rated 'A-' or below is limited and does not constrain our preliminary ratings. At closing, we consider that the transaction's legal structure will be bankruptcy remote, in line with our legal criteria (see "Structured Finance: Asset Isolation And Special-Purpose Entity Methodology," published on March 29, 2017). 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 Excess concentration in certain types of collateral obligations Collateral manager trading performance 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. 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. S&P Global Ratings' quantitative analysis simulates various default patterns, interest rate movements, and foreign exchange rate depreciations, under various stress scenarios taking into account portfolio characteristics, payment mechanics, covenants, collateral quality tests, and excess spread. 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: 10% fixed rate assets and 5.00% current pay obligations. For more detail, please see table 11. The transaction documents require that any collateral obligation sold is replaced with another of equal or higher par value (unless the collateral principal amount is greater than that of the target amount), or that the trade maintains or increases the level of the transaction's overcollateralization. Credit risk, defaulted, and equity securities are exempt from these restrictions. In addition, the indenture requires that each additional purchase satisfy, maintain, or certain additional collateral quality tests. NOVEMBER 15,

8 Table 1 Rating Considerations (cont.) Risk Risk description Mitigating factors Divergence of effective date portfolio from preliminary assumptions Exposure to covenant-lite loans Long-dated collateral obligation can introduce market value risk 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 offers collateral managers a 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. However, through restructuring the transaction allows a 5% bucket of long-dated assets. The weighted-average life test must be satisfied following any maturity amendment. Collateral Manager Black Diamond acts as portfolio manager according to the transaction documents. Black diamond is an affiliate of BDCM, which is a privately held, alternative asset management firm with approximately $6.6 billion in assets under management as of Dec. 31, Quantitative Analysis In analyzing this transaction, we conducted a quantitative review consisting of two analyses: a portfolio analysis and a cash flow analysis. 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 interest and principal (timely interest payment for non-deferrable notes). 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 A A A B NOVEMBER 15,

9 Table 2 Credit Enhancement (cont.) Class Subordination (%) BDR (%) SDR (%) BDR cushion (%) C D E F BDR--Break-even default rate. SDR--Scenario default rate. Supplemental tests We also conduct a largest-industry default test, a largest-obligor default test, a largest sovereign default test, and a largest transfer and convertibility 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 (equivalent, mil. ) Largest industry default test loss amount (mil. ) Largest obligor default test loss amount (mil. ) Largest sovereign test Largest sovereign T&C test A-1 AAA (sf) A-2 AAA (sf) A-3 AAA (sf) A-4 AAA (sf) B AA (sf) C A (sf) N/A D BBB (sf) N/A E BB (sf) N/A F B- (sf) N/A 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 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 NOVEMBER 15,

10 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-1 AAA (sf) AA+ (sf) AA+ (sf) A-2 AAA (sf) AA+ (sf) AA+ (sf) A-3 AAA (sf) AA+ (sf) AA+ (sf) A-4 AAA (sf) AA+ (sf) AA+ (sf) B- AA (sf) AA- AA- (sf) C A (sf) BBB+ (sf) A- (sf) D BBB (sf) BBB- (sf) BBB (sf) E BB (sf) BB- (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 Modelled weighted-average life (years) Weighted-average spread with EURIBOR floor (%) Weighted-average spread without EURIBOR floor (%) 3.91 N/A N/A Standard-deviation of spread (%) 1.40 N/A N/A Weighted-average fixed coupon (%)* *The target portfolio presented to S&P Global Ratings did not contain any fixed-rate assets. 6.00% for euro-denominated assets and 7.00% for U.S. dollar-denominated assets. N/A--Not applicable. EURIBOR--Euro Interbank Offered Rate. Portfolio Characteristics Metrics based on the portfolio presented to us and the level of ramp-up completion are shown in table 7. Table 7 Target Collateral Obligations Target par balance (mil. equivalent) 400 Par balance of identified collateral (mil. equivalent) Par balance of collateral not yet identified (mil., equivalent) S&P Global Ratings' credit rating (% of identified collateral) S&P Global Ratings' implied rating (% of identified collateral) NOVEMBER 15,

11 Table 7 Target Collateral Obligations (cont.) Obligors Number of targeted obligors 157 Number of identified obligors 124 Average obligor holding (%) 0.64 Largest-obligor holding (%) 2.57 Smallest-obligor holding (%) 0.22 In the portfolio data referenced for this analysis, the issuer had identified approximately 70% of the portfolio's collateral. As the portfolio composition changes, the information and results presented in table 8 and charts 3-6 are also likely to change. Obligor concentration The underlying portfolio presented to us for our rating analysis consists of obligors in the industries shown in table 8. Table 8 Top Obligor Holdings Notional amount (mil. $) Notional amount (%) Obligor reference Industry S&P Global Ratings' credit rating Obligor Cumulative Obligor Cumulative 1 Chemicals B Chemicals B Textiles, Apparel and Luxury Goods B Chemicals BB Communications Equipment B Metals and Mining B Personal Products B Independent Power and Renewable Electricity Producers B Diversified Financial Services B Communications Equipment B Industry distribution Chart 3 shows the industry distribution in the portfolio. The targeted portfolio is composed of 40 distinct industries as per the Capital IQ industry Level 3 classification. NOVEMBER 15,

12 Chart 3 Ratings distribution Chart 4 shows the ratings distribution in the portfolio. All of the identified underlying collateral obligations have credit ratings assigned by S&P Global Ratings. NOVEMBER 15,

13 Chart 4 Recovery rating distribution Table 9 presents the recovery rates of the targeted portfolio and recovery rates modeled to calculate BDRs. Chart 5 below presents our recovery rates distribution of the identified portfolio. Of the identified underlying collateral obligations, 100% have recovery ratings issued by S&P Global Ratings. Table 9 Performing Collateral WARR Liability rating Modeled WARR (%) Actual WARR of the targeted portfolio (%) Actual WARR of the identified portfolio (%) AAA (sf) AA (sf) A (sf) BBB (sf) BB (sf) B- (sf) WARR--Weighted-average recovery rate. NOVEMBER 15,

14 Chart 5 Deleveraging profile Chart 6 shows the deleveraging profile of the targeted portfolio. NOVEMBER 15,

15 Chart 6 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 obligations Maximum single obligor (five exceptions up to 2.5%) 2.00 Maximum single obligor of senior unsecured, second lien, mezzanine loans, and high yield bonds 1.50 Covenant-lite loans other than U.S. dollar-denominated loans* Covenant-lite U.S. dollar-denominated loans* Maximum unhedged collateral obligations 2.50 Non-euro obligations (subject to perfect asset swaps) Minimum U.S dollar-denominated obligations NOVEMBER 15,

16 Table 10 Collateral Pool Guidelines (cont.) Type of obligation Limit (%) Maximum U.S. dollar-denominated obligations Current-pay obligations 2.50 Delayed-drawdown and revolving obligations Corporate rescue loans 5.00 Minimum fixed-rate obligations 0.00 Maximum fixed-rate obligations Maximum fixed-rate U.S. dollar-denominated obligations 5.00 Maximum bridge-loans 3.00 Maximum participation interests 5.00 Maximum PIK asset 5.00 Maximum project finance loans 2.50 Maximum obligors domiciled in countries rated below 'A-' Maximum S&P Global Ratings' industry (with two exceptions up to 15.0%/with one exception up to 22.0%) S&P Global Ratings' credit rating of 'CCC+' or below 7.50 Max S&P rating derived from Moody's Obligors with potential total indebtedness of between 100 million and 200 million/$100 million and $200 million 5.00 *Covenant-lite loans are assigned lower recovery ratings than similar obligations that require continued compliance with covenants. PIK--Payment in kind. Risk of concentration in certain obligation types We consider 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 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 eligibility criteria allow the manager to buy up to 2.5% current pay obligation for this transaction. 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. The timing differences are 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. In our analysis, we stress PIK assets if the allowance is greater than 5.0%. Because interest payments for the majority 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, as well as biased defaults toward fixed-rate assets during a low interest-rate environment and toward floating-rate assets in a high interest-rate environment. 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. NOVEMBER 15,

17 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 semiannual. 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 O/C tests? New asset minimum par amount? S&P Global Ratings' 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 less than 100% of the principal balance of assets sold* No No Credit risk Not less than 100% of the sale proceeds of assets sold* N/A No No Credit d Not less than 100% of the principal balance of assets sold* No No Defaulted (including recovery on defaulted assets) Satisfy Not less than 100% of the sale proceeds of assets sold* N/A No No Unscheduled principal Not less than 100% of the principal balance of assets sold* No No Scheduled principal Not less than 100% of the principal balance of assets sold* No No *Alternatively, if the aggregate collateral balance of the portfolio is greater than the reinvestment target par balance. O/C--Overcollateralization. CDO--Collateral debt obligation. NOVEMBER 15,

18 Table 13 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? S&P Global Ratings' 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 Credit risk Passing before and after Not less than 100% of the sale proceeds of assets sold* N/A Yes Yes Credit d Passing before and after Not less than 100% of the principal balance of assets generating proceeds* N/A Yes Yes Defaulted (including recovery on defaulted assets) Unscheduled principal Passing before and after Not less than 100% of the principal balance of assets generating proceeds* N/A Yes Yes Scheduled principal *Alternatively, in the case of unhedged collateral obligation, the aggregate collateral balance of the portfolio is greater or equal to the reinvestment target par balance. The following limitation needs to be satisfied under the documentation after giving effect to such reinvestment: The aggregate principal balance that are rated 'CCC+' or below by S&P Global Ratings may not exceed 7.5%. Alternatively, the SDR after giving effect to such reinvestment is not greater to the SDR before giving effect to such reinvestment. O/C--Overcollateralization. CDO--Collateralized debt obligation. SDR--Scenario default rate. Foreign exchange reinvestment criteria In certain instances, the issuer may use U.S. dollar-denominated proceeds to purchase euro-denominated obligations and euro-denominated proceeds to purchase U.S. dollar-denominated obligations. In such cases, the issuer must ensure that in addition to satisfying all reinvestment conditions mentioned above, the aggregate collateral balance of the portfolio (whereby any U.S. dollar-denominated balances are converted into euro at the spot rate of exchange) is equal to or greater than the reinvestment target par balance. Note 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). NOVEMBER 15,

19 Table 14 Overcollateralization, Interest Coverage, And Interest Diversion Tests Test Actual O/C (%) Min. O/C required (%) Min. I/C required (%) A/B C D E F N/A test N/A (i)the interest diversion test (reinvestment test) will be satisfied when the class E O/C ratio is equal to or higher than the specified level. O/C--Overcollateralization. I/C--Interest coverage. N/A--Not 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. Table 15 Waterfall Payment Priority Priority Interest waterfall Principal waterfall A Taxes, then the issuer's profit amount. Items A to H of the interest waterfall sequentially, but only if not fully paid. B C D E Trustee fees and expenses up to the senior expense cap plus the balance in the expense reserve account, where any non-euro payments are denominated in euro at the spot rate. Administrative expenses up to the senior expense cap plus the expense reserve account less any amounts in B, in all cases where any non-euro payments are denominated in euro at the spot rate. To expense reserve account (at the manager's discretion) up to the senior expense cap less any amounts paid in relation to B and C above and any amounts paid out of the expense reserve account, in all cases where any non-euro payments are denominated in euro at the spot rate. First toward the senior collateral management fee. Second, to the collateral manager for any previously unpaid senior management fees, excluding deferred senior cash manager amounts. If the class A/B coverage tests are not satisfied, redemption of the notes in accordance with the note payment sequence, but only if not fully paid under item I of the interest waterfall and only until the class A/B coverage tests are satisfied. Amounts due and payable on the class C notes (excluding deferred interest, but including interest on deferred interest). Only if not fully paid under item J of the interest waterfall and only if the class C notes are the controlling class. The class C notes' deferred interest, but if not fully paid under item K of the interest waterfall and only if the class C notes is the controlling class. If the class C coverage tests are not satisfied, the redemption of the notes in accordance with the note payment sequence, but only if not fully paid under item L of the interest waterfall and only until the class C coverage test is satisfied. F Any hedge issuer payments (other than defaulted hedge termination payments). Amounts due and payable on the class D notes (excluding deferred interest, but including interest on deferred interest), but only if not fully paid under item M of the interest waterfall and only if the class D notes are the controlling class. G Pro rata and pari passu payment of the class A notes ' interest. The class D notes' deferred interest, but only if not fully paid under item N of the interest waterfall and only if the class D notes is the controlling class. NOVEMBER 15,

20 Table 15 Waterfall Payment Priority (cont.) Priority Interest waterfall Principal waterfall H The class B notes' interest If the class D coverage tests are not satisfied, redemption of the notes in accordance with the note payment sequence, but only if not fully paid under item O of the interest waterfall and only until the class D coverage test is satisfied. I J Upon failure of class A/B coverage tests, to pay in accordance with the note payment sequence.* The class C notes' interest (excluding deferred interest, but including interest on deferred interest). Amounts due and payable on the class E notes (excluding deferred interest, but including interest on deferred interest), but only if not fully paid under item P of the interest waterfall and only if the class E notes are the controlling class. The class E notes' deferred interest, but only if not fully paid under item Q of the interest waterfall and only if the class E notes is the controlling class. K The class C notes' deferred interest. If the class E coverage tests are not satisfied, redemption of the notes in accordance with the note payment sequence, but only if not fully paid under item R of the interest waterfall and only until the class E coverage test is satisfied. L M Upon failure of the class C coverage tests, to pay in accordance with the note payment sequence.* The class D notes' interest (excluding deferred interest, but including interest on deferred interest). Amounts due and payable on the class F notes (excluding deferred interest, but including interest on deferred interest), but only if not fully paid under item S of the interest waterfall and only if the class F notes are the controlling class. The class F notes' deferred interest, but only if not fully paid under item T of the interest waterfall and only if the class F notes is the controlling class. N The class D notes' deferred interest. If the class F coverage tests are not satisfied, the redemption of the notes in accordance with the note payment sequence, but only if not fully paid under item U of the interest waterfall and only until the class F coverage test is satisfied. O P Upon failure of the class D coverage tests, to pay in accordance with the note payment sequence.* The class E notes' interest (excluding deferred interest, but including interest on deferred interest). Item V of the interest waterfall, but only if not fully paid (effective date rating event). On the special redemption date, at the manager's discretion to pay the rated notes in accordance with the note payment sequence.* Q The class E notes' deferred interest. (1) During the reinvestment period to purchase substitute collateral obligations, subject to the reinvestment criteria. (2) After the reinvestment period, reinvestment only of unscheduled sale proceeds, and the sale of credit risk and credit d assets. R S Upon failure of the class E coverage tests, to pay in accordance with the note payment sequence.* The class F notes' interest (excluding deferred interest, but including interest on deferred interest). After the reinvestment period, to redeem the notes in accordance with the note payment sequence.* After the reinvestment period, to pay items X through AA of the interest priority of payments if not paid. T The class F notes' deferred interest. To any reinvestment noteholder of reinvestment amounts. U Upon failure of the class F coverage tests, to pay in accordance with the note payment sequence.* Subject to the incentive collateral management fee internal rate of return threshold having been reached to pay collateral manager 20% of the remaining proceeds. NOVEMBER 15,

21 Table 15 Waterfall Payment Priority (cont.) Priority Interest waterfall Principal waterfall V W X Y Z AA BB CC DD Upon an effective date rating event, to either (i) redeem the notes in accordance with the note payment sequence, or (ii) enter into commitments to purchase additional collateral securities, in both cases, until the effective date rating event ends.* During the reinvestment period only, if the reinvestment overcollateralization test is failing, either (i) toward the acquisition of additional collateral, or (ii) for the redemption of the rated notes in accordance with the note payment sequence. In either case, at an amount equal to the lesser of 50% of the remaining interest proceeds available for payment, or an amount that is sufficient to satisfy the reinvestment par value test. First, to the subordinate management fee; second, to any previously unpaid subordinate management fee; third, at the collateral manager's discretion toward any previously waived senior collateral management amounts; and fourth, for the repayment of any collateral manager advances and any interest thereon. Payment of trustee fees and expenses not paid senior in the waterfall. Payment of administrative expenses not paid senior in the waterfall. Any defaulted hedge termination payments not paid out of the relevant accounts. Transfer the supplemental reserve amount to the supplemental reserve account during the reinvestment period, at the collateral manager's discretion. If the incentive collateral management fee internal rate of return threshold has been met, up to 20% of the remaining proceeds as an incentive collateral management fee. Remaining proceeds to the subordinated notes. Remaining proceeds to the subordinated notes. *Note payment sequence: First, the class A-1, A-2, A-3, and A-4 notes on a pro rata and pari passu basis at the applicable redemption price until they fully redeem, followed by the class B notes in the same manner. Then, the class C notes including unpaid interest and deferred interest at the applicable redemption price until they fully redeem, followed by the class D to F notes in the same manner. Class A notes representing class A-1, A-2, A-3 and A-4 together. Currency conversion provisions The issuer uses euro-denominated proceeds to make payments on euro-denominated items. The issuer uses U.S. dollar-denominated proceeds to make payments on U.S. dollar-denominated items. If there are insufficient proceeds in the euro payment account for the issuer to meet its required euro payments, the issuer exchanges a sufficient amount of U.S. dollars from the U.S. dollar payment account, if available, into euros at the spot rate of exchange to meet its payment requirements. Similarly, if there are insufficient proceeds in the U.S. dollar payment account for the issuer to meet its required U.S. dollar payments, the issuer exchanges a sufficient amount of euros from the euro payment account, if available, into U.S. dollars at the spot rate of exchange to meet its payment requirements. If there are insufficient amounts in the euro and U.S. dollar payment accounts to fully meet any payments, then the payment shortfalls are borne proportionately. Final redemption Unless previously redeemed, or purchased and cancelled, each rated class of notes redeems on the maturity date at their outstanding principal amount plus accrued interest. Full redemption at the subordinated noteholders/retention holder's option All the rated notes may be redeemed in whole but not in part as follow: Only after the noncall period, either (i) with respect to any optional redemption other than through liquidation only, NOVEMBER 15,

22 at the option of the subordinated noteholders acting by ordinary resolution or at the option of the manager, or (ii) with respect to optional redemption through liquidation only at the option of the subordinated noteholders acting by unanimous resolution (excluding any subordinated notes held by the manager) and subject to the manager's written consent. At any time after the occurrence of a collateral tax event, at the option of the subordinated noteholders acting by ordinary resolution. The notes redeem at their outstanding principal amount from the portfolio's liquidation proceeds, or from the refinanced notes' issuance proceeds. Refinancing of a class or classes of notes at the portfolio manager or subordinated noteholders' option Only after the noncall period can an entire class of notes be refinanced at the portfolio manager's or the subordinated noteholders' option. The refinanced class redeems at its outstanding principal amount from the refinanced notes' issuance proceeds. Portfolio manager clean-up call After the noncall period, all of the rated notes may redeem at the same time at the portfolio manager's option if the outstanding portfolio's size is below 15% of the target par amount. The notes redeem at their outstanding principal amount from the portfolio's liquidation proceeds. Redemption following a note tax event The most senior outstanding class of notes, or the subordinated noteholders, may vote to simultaneously redeem all of the notes (if the issuer is unable to change its residency): If a change in tax law makes interest or principal payments on any class of notes subject to withholding tax; or If the U.K. or U.S. tax authorities impose a tax on the issuer. Events Of Default The following events of default may lead to the acceleration of payments to the rated notes: The issuer fails to pay interest on the class A or class B notes when due and payable. The issuer fails to pay any principal when due and payable on any rated class of notes on the maturity date or any redemption date. The issuer fails on any payment date to disburse any amounts available in the payment account, principal account, interest account, or expense reserve account according to the waterfalls, and this failure continues for five days. After the effective date, the ratio of the aggregate portfolio size (with defaulted assets carried at their market value) over the class A notes outstanding principal amount falls below 102.5%. The issuer does not comply with any of its material covenants or warranties under the transaction documents, or any of its documented representations or warranties cease to be correct. The trustee determines the materiality. Proceedings are initiated against the issuer under any insolvency law, or a receiver is appointed. It becomes unlawful for the issuer to perform its obligations under the notes. The issuer or any of the collateral becomes required to register as an investment company under the Investment Company Act, and this requirement continues for 45 days. NOVEMBER 15,

23 Structural Overview Black Diamond CLO , the issuer, is a special-purpose entity (SPE) that was incorporated as an exempted company with limited liability under the laws of Ireland. The issuer's only purposes are to acquire the collateral portfolio, issue the notes, enter into 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 latest European legal criteria. In rating this transaction, we will review the legal matters that we consider to be relevant to our analysis, as outlined in our criteria. 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 - General: Foreign Exchange Risk In Structured Finance--Methodology And Assumptions, April 21, 2017 Legal Criteria: Structured Finance: Asset Isolation And Special-Purpose Entity Methodology, March 29, 2017 Criteria - Structured Finance - CDOs: Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs, Aug. 8, 2016 Criteria - Structured Finance - General: Ratings Above The Sovereign - Structured Finance: Methodology And Assumptions, Aug. 8, 2016 Criteria - Structured Finance - General: Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014 Criteria - Structured Finance - CDOs: CDOs Of Project Finance Debt: Global Methodology And Assumptions, March 19, 2014 Criteria - Financial Institutions - Banks: Assessing Bank Branch Creditworthiness, Oct. 14, 2013 General Criteria: Methodology Applied To Bank Branch-Supported Transactions, Oct. 14, 2013 Criteria - Structured Finance - General: Counterparty Risk Framework Methodology And Assumptions, June 25, 2013 Criteria - Structured Finance - General: Global Derivative Agreement Criteria, June 24, 2013 General Criteria: Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 1, 2012 General Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012 General Criteria: Methodology: Credit Stability Criteria, May 3, 2010 Criteria - Structured Finance - CDOs: The Use Of Rating-Based Haircuts In Event Of Default Overcollateralization Tests For CDOs, March 19, 2008 Criteria - Structured Finance - CDOs: Qualification And Treatment Of Current-Pay Obligations In Global Cash Flow NOVEMBER 15,