Structured Finance

CLOs / Europe

Bosphorus CLO II Designated Activity Company

Presale Report

Inside This Report

Capital Structure
Expected Amount Interest Rate Final TTLM
Transaction Summary 1 Class Ratinga Outlook (EURm) CE (%)b (%) Maturity TT (%)c (x)d
Key Rating Drivers 1
Asset Analysis 2 A AAA(EXP)sf Stable 163.6 40.44 3m E + 1.43% 2025 59.5 8.5
Cash Flow Analysis 4 B AA+(EXP)sf Stable 30.5 29.35 3m E + 2.15% 2025 11.1 1.6
Transaction and Legal Structure 7 C A(EXP)sf Stable 22.2 21.27 3m E + 3.25% 2025 8.1 1.2
Counterparty Risk 8 D BBB(EXP)sf Stable 13.9 16.22 3m E + 5.00% 2025 5.1 0.7
Rating Sensitivity 10 E BB(EXP)sf Stable 16.2 10.33 3m E + 7.50% 2025 5.9 0.8
Criteria Application, Model and Data F B(EXP)sf Stable 8.0 7.38 3m E + 8.75% 2025 2.9 0.4
Adequacy 11 Sub Notes NR(EXP)sf n.a. 23.3 Residual 2025 8.5
Performance Analytics 11 Total
a
Appendix A: Transaction Overview 12 Expected ratings do not reflect final ratings and are based on information provided in the preliminary prospectus, dated
Appendix B: Fitch’s Asset Manager 7th March 2016. These expected ratings are contingent on final documents conforming to information already received.
Profile 13 Ratings are not a recommendation to buy, sell or hold any security. The prospectus and other material should be
reviewed prior to any purchase
Appendix C: Priority of Payments 16 b
Credit enhancement (CE) is based on the portfolio balance of EUR275m
Appendix D: Par Value Tests 17 c
Tranche Thickness (TT) percentage – ratio of class size to collateral balance
d
Tranche Thickness Loss Multiple (TTLM) – TT% divided by Fitch’s base case loss expectation. See also Structured
Finance Tranche Thickness Metrics

Transaction Summary
Bosphorus CLO II Designated Activity Company is a cash flow collateralised loan obligation
(CLO). Net proceeds from the issuance of the notes will be used to purchase a EUR275m
portfolio of mainly European leveraged loans. Commerzbank AG acts as investment manager.

Key Rating Drivers

Related Criteria
Global Structured Finance Rating Criteria
(July 2015)
Global Rating Criteria for CLOs and
Corporate CDOs (November 2015)
Criteria for Interest Rate Stresses in
Structured Finance Transactions and
Covered Bonds (December 2014)
Counterparty Criteria for Structured
Finance and Covered Bonds (May 2014)
Criteria for Sovereign Risk in Developed
Markets for Structured Finance and
Covered Bonds (February 2015)
Limited Reinvestment Period: Fitch Ratings expects the portfolio to be 100% ramped at
closing. The manager is only allowed to reinvest unscheduled principal proceeds for one year.
Credit impaired and defaulted obligations can be sold at any time and any sale proceeds will be
used to redeem the notes.
Higher Obligor Concentration: The transaction is exposed to higher obligor concentration
than other CLO transactions, with the presented portfolio consisting of 57 assets from 45
obligors. The largest obligor represents 2.61% and the largest 10 obligors represent 26.08% of
the portfolio notional balance.
Shorter Risk Horizon: The transaction's weighted average life (WAL) is 5.35 years and the
maximum WAL covenant is six years. The shorter risk horizon means the transaction is less
vulnerable to underlying prices, and economic and asset performance.
Portfolio Credit Quality: The average credit quality of obligors will be in the ‘B’ category, with
the weighted average rating factor (WARF) of the portfolio 33.43. Fitch Ratings has credit
opinions or public ratings on 100% of the identified portfolio. There are no ‘CCC’ rated assets in
the portfolio.

High Recovery Expectations: The portfolio will comprise senior secured loans and bonds.
Recovery prospects for these assets are typically more favourable than for second-lien,
unsecured, and mezzanine assets. Fitch has assigned Recovery Ratings for all assets in the
presented portfolio. The weighted average recovery rate (WARR) of the portfolio is 68.27%.
Analysts
Vincent Scalvenzi Class F Turbo Feature: Twenty-five percent of the interest proceeds remaining after payment
+44 20 3530 16539
vincent.scalvenzi@fitchratings.com of the subordinated management fee is used to pay down the Class F note on each payment.
The effectiveness of the turbo is enhanced on the first payment date by the presence of the first
Yushuang Hao
+44 20 3530 1717 period interest reserve account.
yushuang.hao@fitchratings.com

www.fitchratings.com 29 March 2016

 Structured Finance

Asset Analysis
The manager is only allowed to reinvest unscheduled principal proceeds for one year, subject
to strict requirements. After the end of the reinvestment period, all principal proceeds will be
used to redeem the notes.

In Fitch’s view, reinvestment conditions limit the manager’s ability to deteriorate the portfolio.
Fitch therefore based its analysis on the identified portfolio provided by the manager.

Figure 1
Conditions to Reinvestment
During the one year reinvestment period
Type of proceeds: Unscheduled principal
Collateral quality tests WAL and WARF tests satisfied after reinvestment. Other tests satisfied, or, if
failing, maintained or improved.
Portfolio profile tests Maximum ‘CCC+’ rated assets test satisfied after reinvestment; other tests
satisfied, or if failing, maintained or improved.
Coverage tests Each coverage test is satisfied before and after reinvestment.
Maturity requirements Asset maturity may be no longer than the asset that produces the proceeds.
Paramount requirements APB of substitute CO at least equals APB of CO that produces the
unscheduled proceeds.
APB – Aggregate principal balance; CO – Collateral obligation
Note: Conditions to reinvestment outlined above assume additional assets meet the definition of a collateral obligation
and comply with eligibility criteria, as defined in the trust deed
Source: Fitch

Credit impaired and defaulted obligations can be sold at any time and any sales proceeds will
be used to redeem the notes. Discretionary and credit-improved sales are not allowed under
the transaction documents.

The portfolio will be 100% ramped at closing. The manager provided Fitch with a portfolio that it
expects to be the closing portfolio, but may change as a result of defaults, assets becoming
ineligible before closing or prepayment. The portfolio includes 69 assets from 54 mainly high-
yield (HY) obligors, with a notional balance of EUR275m.

Asset Credit Quality

The portfolio’s rating distribution has 68.33% of assets rated ‘B’ or better, with the remaining
31.67% of assets rated ‘B−’. Fitch has a public rating or credit opinion on all 54 obligors in the
portfolio. The WARF of the portfolio is 33.43. The portfolio does not include assets rated ‘CCC’
or lower by Fitch

Figure 2
Portfolio Rating Distribution
Bosphorus CLO I (as of November 2015): 33.55 WARF Bosphorus CLO II: 33.43 WARF
(%, notional)
60
50
40
30
20
10
0
BB BB- B+ B B- CCC
Source: Fitch

Asset Security
The closing portfolio will consist of 100% senior secured assets. Fitch has assigned recovery
ratings to all assets in the portfolio. The WARR of the portfolio is 68.27%.

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Figure 3
Portfolio Recovery Rating Distribution
Bosphorus CLO I (as of November 2015): 66.93 WARR Bosphorus CLO II: 68.27 WARR

(%, notional)

60
50
40
30
20
10
0
RR1 RR2 RR3 RR4 RR5 RR6
Source: Fitch

Cov-Lite Loans
The portfolio includes 25 loans indicated by the manager to be cov-lite loans, representing
42.62% of the portfolio balance. These loans typically do not contain any financial covenants or
lack maintenance covenants (incurrence covenants may still be present). The lack of
maintenance covenants may cause a distressed obligor to default later than under a traditional
loan, thereby delaying the start of recovery proceedings.

Fitch has analysed historical recovery rates for cov-lite loans and found no significant reduction
in recovery prospects compared to traditional loans. In Fitch’s view, the available protection
adequately addresses the risks of the portfolio, including the exposure to cov-lite loans.

Exposure to Countries with a Country Ceiling Below ‘AAA’

Figure 4
Portfolio Country Distribution
Bosphorus CLO I (as of November 2015) Bosphorus CLO II
(%, notional)
35
30
25
20
15
10
5
0
Germany Netherlands United Denmark Belgium Austria Luxembourg
Kingdom
Source: Fitch

Figure 5
Top Three Industry The transaction has limited exposure to assets domiciled in countries with a Fitch Country
Concentrations Ceiling below ‘AAA’. In the portfolio such assets make up 3.12% of the notional balance. The
(% par amount) two assets domiciled in countries with a Fitch Country Ceiling below ‘AAA‘ are located in Spain.
Industry Concentration The Country Ceiling for Spain is ‘AA+’.
Healthcare 17.73
Retail 9.94 Fitch assumed that all the assets with rating levels above the Country Ceiling would default as
Packaging and 9.70
Containers part of the modelled rating default rate (RDR). Fitch applied a further 50% devaluation haircut
Source: Fitch to the expected recoveries at the ‘AAA’ rating level for assets in these jurisdictions — assuming
that recovery rates may be realised in non-euro currencies — to assess transfer and
convertibility risk if a country was to leave the currency union. This is in line with Fitch’s Criteria
for Sovereign Risk in Developed Markets for Structured Finance and Covered Bonds, dated 20
February 2015.

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Obligor and Industry Concentration

The transaction is slightly more concentrated than other CLO 2.0 transactions. This is reflected
in the number of obligors included in the current closing portfolio. The portfolio included 54
obligors whereas the minimum number of obligor observed across Fitch rated CLO 2.0 is
approximatively 60.

The largest obligor represents 2.43% and the largest 10 represent 24.28% of the portfolio. The
portfolio includes 69 loans from 54 issuers. In the current closing portfolio, the largest industry
represents 17.73% of the portfolio and the three largest industries make up 37.37% of the
portfolio.

Figure 6
Notable Collateral Characteristics
Description Portfolio (%)
Portfolio asset other than senior secured loans and/or senior secured bonds 0
Assets that are FRNs or high yield bonds 9.45
Fixed rate assets 1.82
Fitch ‘CCC’ obligations 0
Cov-lite assets 42.62
Largest industry 17.73
Largest obligor 2.44
Largest country 25.12
Source: Fitch

Risk Horizon
The static portfolio has a WAL of 5.35 years. The transaction’s legal final maturity is scheduled
for October 2025, which is 9.5 years from the closing date. The maturity of the longest-dated
asset included in the presented portfolio is scheduled to be June 2023, which is 28 months
before the legal final maturity and therefore allows enough time to work out potential defaults
on assets.

Amend and Extend

Figure 7 Amend-and-extend is a phenomenon which evolved during the credit crisis, whereby
Portfolio Credit Model companies could go to their lenders and ask them to agree to maturity extensions on their
Results loans in return for an increased margin. While this enables companies to bypass the capital
WARF33.43; WARR
68.27%
markets when financing is hard to come by, it was not foreseen in legacy Fitch-rated CLOs.
(%) RDR RRR
Amend-and-extend poses a risk if the loan maturities are extended past the legal final maturity
AAAsf 56.9 32.0 of the CLO bonds.
AAsf 52.8 40.0
Asf 47.6 45.0 In Fitch’s view, amend-and-extend was an emergency refinancing approach adopted during the
BBBsf 42.9 52.9
BBsf 35.1 64.7 crisis when capital markets were effectively shut. Once primary issuance returned, amend-and-
Bsf 30.3 70.0 extend activity rapidly disappeared. The ability to amend and extend makes loans more flexible
Base case 23.9 70.7 than bonds and, in Fitch’s view, has resulted in better performance.
Source: Fitch

Amend and extend risks are mitigated by language in the transaction documents restricting the
investment manager or issuer’s ability to agree to changes affecting an underlying transaction’s
maturity.

Portfolio Credit Model

The Fitch Portfolio Credit Model (PCM v. 2.4.8) was used to determine hurdle default rates
(RDRs) and expected portfolio recovery rates (rating recovery rates or RRRs) for the relevant
rating levels. As the manager cannot reinvest principal proceeds and the portfolio has been
fully ramped as of the day of the analysis, PCM was only run on the identified portfolio.

Cash Flow Analysis

Fitch used a customised proprietary cash flow model to replicate the principal and interest
waterfalls and the various structural features of the transaction and to assess their

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effectiveness, including the structural protection provided by excess spread diverted through
the overcollateralisation (OC) and interest coverage (IC) tests. The cash flow model was run
using the PCM inputs for the initial portfolio provided by the investment manager.

Excess Spread Diversion

The structure includes standard OC and IC tests. Failure of an OC or IC test will result in
interest or principal proceeds being diverted to redeem the rated notes in sequential order.
Defaulted assets, which include among others, assets rated ‘CC’ or below by Fitch, are
considered at the lower of the market value and the recovery rate.

The OC tests apply a haircut to the par value of ’CCC’ assets in excess of 7.5% of the assets
(inclusive of defaults at market value). Fitch views such language favourably and has
incorporated it in its analysis, as ’CCC‘ concentrations tend to precede defaults in base or
lower-stress scenarios; this is particularly true for lower-rated notes, which are more dependent
on excess spread diversion.

Figure 8
Overcollateralisation Tests
(%) Trigger Initial level Cushion
Class A/B 132.30 141.68 9.38
Class C 121.00 127.14 6.14
Class D 114.35 119.46 5.11
Class E 107.75 111.61 3.86
Class F 105.25 108.10 2.85
Source: Fitch

Interest Rate and Basis Risk

The portfolio includes two fixed rate bonds, which make up for 1.8% of the outstanding portfolio
balance. The moderate number of assets in the portfolio paying fixed interest rates limits the
exposure of the notes to interest rate risk.

Basis and reset risk is hedged for most of the portfolio through the floating rate, quarterly
paying (or, if there is a frequency switch, semi-annually paying) liabilities. 66.2% of the assets
included in the portfolio pay quarterly, 1.5% weekly, 17.3% monthly and 15% semi-annually.

Liquidity issues may arise, however, if the underlying loans re-fix to a basis longer than six
months. Loan documentation generally states that any terms over six months need to be
agreed by the lenders; any such request and agreement would be a sign of distress on behalf
of the obligor and would be captured as part of the modelled default rates.

The reset risk is restricted to a single quarter, due to the presence of an interest-smoothing
account. The interest-smoothing account on each quarterly payment date reserves half the
proceeds from semi-annual paying assets for the next payment date – effectively converting
one semi-annual payment into two quarterly payments.

A large proportion of assets resetting to semi-annual in any one quarter, in combination with
significant defaults, may cause a liquidity stress for the non-deferrable senior notes. The reset
risk is mitigated by a switch option (the frequency switch event) where the payment frequency
on the notes will switch to semi-annual if, during the previous due period, 20.0% or more of the
portfolio assets reset to semi-annual. A frequency switch event also requires that any of the
class A and B notes’ balance remains outstanding and additionally, that the ratio of scheduled
and projected interest receipts (excluding those received from defaulted obligations) and
amounts credited to the interest smoothing account to the scheduled interest due on class A
and B is less than 120%. This means that, on a determination date, it is possible that the
upcoming payment date will be suspended and the noteholders will be paid on the following
payment date.

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Cash Flow Model Outputs

The breakeven default rates (BDRs) show the maximum portfolio default rates the rated notes
could withstand in stress scenarios without experiencing a loss. Fitch then compared the BDRs
for the rated notes to the PCM hurdle rates at the relevant rating stress. A rating committee
would typically expect the BDR to be above the PCM hurdle rate to achieve a given rating.

Figure 9
Lowest Breakeven Default Rate
Class A Class B Class C Class D Class E Class F
Breakeven default rate (%) 59.6 57.5 47.4 42.9 35.0 31.2
Assumed recovery rate (%) 32.0 40.0 45.0 52.9 64.7 70.0
Breakeven loss rate (%) 40.5 34.5 26.1 20.2 12.4 9.4
Credit enhancement (%) 40.5 29.4 21.4 16.3 10.4 7.5
Excess spread benefit (%)a 0.0 5.1 4.7 3.9 2.0 1.9
PCM hurdle default rate (%) 56.9 54.3 47.6 42.9 35.1 30.3
Default cushion (%) 2.7 3.2 -0.2 0.0 -0.1 0.9
Default timing scenario Front Front Mid Mid Back Back
EURIBOR scenario Up Up Up Up Up Up
Number of failing scenarios 0/12 0/12 1/12 0/12 1/12 0/12
a
Calculated as break even loss rate, less credit enhancement
Source: Fitch

Figure 9 presents the lowest BDR achieved in the nine stress scenarios evaluated in Fitch’s
cash flow model. For all tranches, the Euribor Up interest rate scenario, as defined in Fitch’s
criteria, was the most stressful. For the A and B tranches, the front-default timing was the most
stressful, for classes C and D the mid-default timing was the most stressful, while for the
classes E and F the mid default timing was most stressful.

Two tranches, the class C and E notes, fail one scenario and the breakeven default rate is
below the default hurdle rate by less than 0.2%. Fitch considered these results in light of
several mitigating factors. The transaction is static and has a shorter than typical WAL. As a
result, the notes are likely to amortise faster. In addition, the portfolio contains no ‘CCC’ assets
or mezzanine assets.

Figure 10
Shows the Benefit of Excess Spread to the Notes
Target portfolio Target portfolio
No excess spread Including excess spread
Rating scale CE v PCM RLR Best pass as per cash flow model
AAA Class A Class A
AA+ Class B
AA
AA-
A+ Class B
A Class C
A-
BBB+ Class C
BBB Class D
BBB-
BB+ Class D Class E
BB
BB-
B+ Class E
B Class F
B-
CCC or below Class F
Source: Fitch

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Transaction and Legal Structure

Transaction Structure

Figure 11
Structure Diagram
The Bank of New York Mellon,
Commerzbank AG, London Branch
London Branch
(Investment Manager)
(Trustee)

Class A Notes

Class B Notes

Sale of Asset to Principal and Class C Notes

Issuer Interest
Asset Portfolio Class D Notes
Bosphorus CLO I Limited
Loans and HY
(Issuer)
Bonds
Note Class E Notes
Purchase
Price Proceeds
Class F Notes

Subordinated
The Bank of New York Mellon, Notes
London Branch
(Account Bank)

Source: Transaction documents

Originator Structure

Figure 12
Originator Diagram
Commerzbank AG Polar Securities Inc.
(Warehouse Funding (Manager of
and CLO Manager) Originator)

Bosphorus Capital
NPIC Limited Bosphorus CLO I
Limited (Warehouse/
(Originator) Limited (Issuer)
Seller)

Source: Fitch, Transaction document. As at date.

The assets were purchased in the open market and warehoused in Bosphorus Capital Limited,
a special purpose vehicle owned by Commerzbank AG.

Fitch expects the portfolio assets to be transferred from the warehouse to the issuer at closing.
However, under the terms of the asset sale agreements, default and market pricing risk to
around 70% of the assets was transferred to the originator in January 2016. For example, if
there is a default of loans among that 70% of the portfolio assets, the originator will purchase
the loan at an agreed price. The originator will also hold the retention stake.

The issuer will only pay for the portfolio assets at the time the assets are settled into the issuer,
to mitigate counterparty risk regarding the originator or Bosphorus Capital. Fitch has received
and reviewed legal opinions addressing the true sale of both transfers.

Events of Default
Failure to make timely payments of class A and B interest would trigger an event of default for
the transaction, which could adversely affect the class A and B notes. Fitch therefore tested in

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its cash flow model that interest on both classes is paid in a timely manner in all stress
scenarios when analysing the class A and B notes.

On any measurement date after the effective date, an event of default (EoD) will occur if the
ratio of the aggregate principal balance (including defaults at market value) of the portfolio to
the aggregate outstanding amount of the class A notes is less than 100%.

If an EoD occurs, the trustee will, either at its discretion or by request of the controlling class
(initially class A), vote to accelerate the transaction and declare all notes to be immediately due
and payable.

Optional Redemption/Refinancing
The transaction features optional redemption and refinancing provisions that may be
undertaken any time after the non-call period has expired and at the direction of a majority of
the subordinated noteholders. An optional redemption may consist of either a redemption of all
classes of notes from sale proceeds and/or refinancing proceeds, or a redemption of one or
more classes of notes (in whole) solely from refinancing proceeds (subject to certain
conditions). Notes are redeemable at a price equal to their outstanding par amount, plus any
accrued, deferred and unpaid interest thereon. Fitch’s credit view on these features is neutral,
since repayment in whole of the applicable class of notes is a prerequisite to any redemption or
refinancing. Furthermore, any refinancing is conditional on the new notes having the same
terms and conditions as the old ones, but with an interest rate equal to or lower than the
refinanced notes.

Rating Agency Confirmations

Fitch notes that the documents allow the trustee to approve certain changes to transaction
documents upon the receipt of a rating confirmation without further reference to investors.
However, the rating impact is not equivalent to determining whether such a change is
prejudicial to the interests of investors. It should also be noted that the provision of rating
confirmations is at the discretion of Fitch and we may choose not to provide rating
confirmations. Further information regarding Fitch's position with respect to rating confirmations
can be found in the special report Unintended Consequences of Rating Confirmation
References, available on Fitch's website at www.fitchratings.com.

Disclaimer
For the avoidance of doubt, Fitch relies, in its credit analysis, on legal and/or tax opinions
provided by transaction counsel. As Fitch has always made clear, Fitch does not provide legal
and/or tax advice or confirm that the legal and/or tax opinions or any other transaction
documents or any transaction structures are sufficient for any purpose. The disclaimer at the
foot of this report makes it clear that this report does not constitute legal, tax and/or structuring
advice from Fitch, and should not be used or interpreted as legal, tax and/or structuring advice
from Fitch. Should readers of this report need legal, tax and/or structuring advice, they are
urged to contact relevant advisers in the relevant jurisdictions.

Counterparty Risk
Investment Manager
The transaction will be managed by Commerzbank AG’s Debt Fund Management team (DFM).
As part of its analysis, Fitch’s Funds and Asset Manager Ratings Group evaluated the DFM
and determined its capabilities satisfactory, in the context of the ratings assigned to the
transaction and the investment parameters that govern DFM’s activities (see Appendix B).

As compensation for managing the portfolio, the investment manager will receive senior and
subordinated investment management fees of 20bp and 15bp a year, respectively, based on
the aggregate collateral balance as of the beginning of the applicable payment period
(including any defaulted obligations at par). The senior management fee is paid prior to class A

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note interest, while the subordinate management fee will be payable after all note interest has
been paid.

The transaction also features a subordinated incentive investment manager fee, which is
activated once the subordinated noteholders reach an internal rate of return (IRR) of 15%.
Once this threshold is reached, the manager receives 20% of the excess spread available after
paying interest on all rated notes and curing coverage tests, with the remainder distributed to
subordinated noteholders.

The portfolio manager has the option of deferring the receipt of any subordinated investment
management fee and to instead apply such fee in accordance with the priorities of payment.
Any deferred fees will accrue interest and will be payable at the next payment date, at their
respective positions in the transaction priority of payments.

In addition, the manager may receive a make-whole investment management fee following the
occurrence of an early redemption in whole. This amount will equal the present value of the
senior and subordinated fees that would have been due had the redemption not occurred.

In Fitch’s view, the asset management fees comply with industry standards. This is an
important factor in facilitating the replacement of a portfolio manager in the event of the
departure of key members of the management team, or any other form of wind-down,
bankruptcy, or insolvency of the existing portfolio manager.

Account Bank
The issuer will hold collections from the portfolio in the principal and interest accounts, which
will be held with The Bank of New York Mellon SA/NV (AA-/Stable/F1+). If The Bank of New
York Mellon SA/NV is downgraded below ‘A’/’F1’, the issuer must find a replacement account
bank with the required rating within 30 calendar days.

Other Counterparties
Provisions for the eligible investments to be purchased with intra-period interest and principal
collections, as well as the rating requirements of the institutions at which the issuer’s various
bank accounts will be established, conform to Fitch’s counterparty criteria for supporting note
ratings up to ‘AAAsf’. Requirements for other counterparties, such as the trustee, collateral
administrator and custodian, also conform to Fitch criteria.

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Rating Sensitivity
In addition to Fitch’s stated criteria, the agency analysed the structure’s sensitivity to the
potential variability of key model assumptions. The rating sensitivity analysis is based on the
Fitch stressed portfolio. These sensitivities describe the model-implied impact of a change in
one or more of the input variables. This is designed to provide information about the sensitivity
of the rating to key model assumptions. It should not be used as an indicator of possible future
performance. The key model assumptions analysed are described below.

Rating Sensitivity to Defaults

Class A Class B Class C Class D Class E Class F
Original rating AAA(EXP)sf AA+(EXP)sf A(EXP)sf BBB(EXP)sf BB(EXP)sf B(EXP)sf
Default rate AA+(EXP)sf A+(EXP)sf BBB+(EXP)sf BB+(EXP)sf B+(EXP)sf CCC(EXP)sf
multiplier of 1.25x
Default rate AA- (EXP)sf A(EXP)sf BBB-(EXP)sf BB+(EXP)sf B-(EXP)sf CCC(EXP)sf
multiplier of 1.50x or below
Source: Fitch

Rating Sensitivity to Recoveries

Class A Class B Class C Class D Class E Class F
Original rating AAA(EXP)sf AA+(EXP)sf A(EXP)sf BBB(EXP)sf BB(EXP)sf B(EXP)sf
Recovery rate AA+(EXP)sf AA-(EXP)sf BBB+(EXP)sf BB+(EXP)sf B-(EXP)sf CCC(EXP)sf
multiplier of 0.75x or below
Recovery rate AA(EXP)sf A(EXP)sf BB+(EXP)sf BB-(EXP)sf CCC(EXP)sf CCC(EXP)sf
multiplier of 0.50x or below or below
Source: Fitch

Rating Sensitivity to Shifts in Multiple Factors

Class A Class B Class C Class D Class E Class F
Original rating AAA(EXP)sf AA+(EXP)sf A(EXP)sf BBB(EXP)sf BB(EXP)sf B(EXP)sf
Default rate A+(EXP)sf BBB+(EXP)sf BB+(EXP)sf BB-(EXP)sf CCC(EXP)sf CCC(EXP)sf
multiplier of 1.25x, or below
recovery rate
multiplier of 0.75x
and 2x base
correlation
Source: Fitch

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Criteria Application, Model and Data Adequacy

Criteria Application
The key criteria report used in this analysis is Global Rating Criteria for Corporate CDOs, dated
November 2015 and available at www.fitchratings.com. Additional criteria used in Fitch’s
analysis are listed on page 2.

Model
The credit analysis followed a two-step process. First, the agency analysed the portfolio’s
default and recovery probabilities using Fitch’s PCM v 2.4.7, in accordance with its corporate
CDO criteria. Second, Fitch analysed the structure using its proprietary cash flow model, as
customised for the transaction’s specific structural features, in accordance with the cash flow
analysis criteria.

Data Adequacy
Fitch used privately available information to provide credit opinions on the assets in the
portfolio. The portfolio information used in Fitch’s analysis is as of March 2016.

Fitch’s credit opinions and recovery ratings are produced by the Corporates Group and
reviewed by a rating committee on a periodic basis. Fitch will review and update its credit
opinions and recovery ratings through this committee process at least annually, with informal
reviews on a semi-annual basis and ongoing monitoring of information in the market.

Performance Analytics
Fitch will monitor the transaction regularly and as warranted by events. Events that may trigger
a review include, but are not limited to:

 issuance of any additional notes;

 entering into an interest rate hedge;

 substitution of the underlying specified security;

 asset defaults, paying particular attention to restructurings and recoveries;

 portfolio migration, including assets being downgraded to ‘CCC’ or portions of the portfolio
being placed on Rating Watch Negative or Outlook Negative;

 an OC or IC test breach;

 breach of concentration limitations or portfolio quality covenants; and

 changes to Fitch’s rating criteria.

Surveillance analysis is conducted on the basis of the then-current portfolio. Fitch’s goal is to
ensure that the assigned ratings remain an appropriate reflection of the issued notes’ credit risk.
Details of the transaction’s performance are available to subscribers on Fitch’s website at
www.fitchratings.com.

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Appendix A: Transaction Overview

Bosphorus CLO II Designated Activity Company HY Loan CDOs/Europe

Figure 13
Capital Structure
Expected
Class Expected Rating Outlook Size (% assets) Amount (EURm) CE (%)a Interest rate (%) PMT freq. Final maturity
A AAA(EXP)sf Stable 59.5 163.6 40.51 3m E + 1.43% Quarterly 2025
B AA+(EXP)sf Stable 11.1 30.5 29.42 3m E + 2.15% Quarterly 2025
C A(EXP)sf Stable 8.1 22.2 21.35 3m E + 3.25% Quarterly 2025
D BBB(EXP)sf Stable 5.1 13.9 16.29 3m E + 5.00% Quarterly 2025
E BB(EXP)sf Stable 5.9 16.2 10.4 3m E + 7.50% Quarterly 2025
F B(EXP)sf Stable 2.9 8.0 7.5 3m E + 8.75% Quarterly 2025
Sub notes NR(EXP)sf n.a. 8.5 23.3 - Residual Quarterly 2025
Total 101.0 277.7
NR  Not Rated. n.a.  Not applicable
a
Based on the portfolio balance of EUR275m
Source: Fitch

Key Information
Parties
Closing date April 2016 Arranger Sterne, Agee & Leach, Inc.
Country of assets and type Europe/loans and bonds Trustee The Bank of New York Mellon, London
Branch
Country of SPV Ireland Collateral administrator The Bank of New York Mellon SA/NV, Dublin
Branch
Primary analyst Vincent Scalvenzi Investment manager Commerzbank AG, London Branch
+44 20 3530 1653 Issuer Bosphorus CLO II Designated Activity
Company Limited
Secondary analyst Yushuang Hao Account bank The Bank of New York Mellon, London
Branch
+44 20 3530 1717
Leveraged finance analyst Ishani Goonasekera
+44 20 3530 1509
Source: Fitch

Key Rating Drivers Simplified Structure Diagram

Limited Reinvestment Period: The portfolio is expected to be 100%
ramped at closing. The manager is only allowed to reinvest unscheduled The Bank of New York
Commerzbank AG,
Mellon,
principal proceeds for 1 year. Credit impaired and defaulted obligations London Branch
London Branch
can be sold at any time and any sale proceeds will be used to redeem (Investment Manager)
(Trustee)
the notes.
Higher Obligor Concentration: The transaction is exposed to higher
obligor concentration than other CLO transactions, with the presented
portfolio consisting of 57 assets from 45 obligors. The largest obligor Class A Notes
represents 2.61% and the largest 10 obligors represent 26.08% of the
Class B Notes
portfolio notional.
Shorter Risk Horizon: The transaction's weighted average life (WAL) is
Class C Notes
5.35 years and the maximum WAL covenant is set at 6 years. The
Asset
shorter risk horizon means the transaction is less vulnerable to Bosphorus CLO
Portfolio I Limited Class D Notes
underlying prices, and economical and asset performances. Loans and
Portfolio Credit Quality: The average credit quality of obligors will be (Issuer)
HY Bonds Class E Notes
in the ‘B’ category, with the weighted average rating factor (WARF) of
the portfolio being 33.43. Fitch Ratings has credit opinions or public Class F Notes
ratings on 100% of the identified portfolio. There are no ‘CCC’ rated
assets in the portfolio. Subordinated
High Recovery Expectations: The portfolio will comprise senior The Bank of New York Mellon, Notes
secured loans and bonds. Recovery prospects for these assets are London Branch
typically more favourable than for second-lien, unsecured, and (Account Bank)
mezzanine assets. Fitch has assigned Recovery Ratings for all assets in
the presented portfolio. The weighted average recovery rate (WARR) of Source: Transaction documents
the portfolio is 68.27%.
Class F Turbo Feature: 25% of the interests proceed remaining after
payment of the subordinated management fee is used to paydown the
Class F note on each payment. The effectiveness of the turbo is
enhanced on the first payment date by the presence of the first period
interest reserve account.
Source: Fitch

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 Structured Finance

Appendix B: Fitch’s Asset Manager Profile

Manager Profile
DFM is a functionally independent and segregated division of Commerzbank AG
(BBB+/Stable/F2). The bank has been active in loan origination and management on balance
sheet since 1998; its DFM activities began in 2007, with loan funds managed since 2009. It
managed two loan vehicles, Bosphorous Capital Limited (BCL) and Bosphorous Investments
Limited (BIL), and one static CLO (Bosphorous CLO I Ltd) with combined assets under
management of about EUR780m. BCL is funded by the bank and effectively acts as a CLO
warehouse facility; BIL is subscribed by a limited number of third-party investors.

Fitch’s View
Strengths
 Investment-grade rated and well-resourced parent.

 Low number of invested issuers per analyst and experienced portfolio manager.

 Pragmatic approach to business development.

 Embedded risk management framework and support from bank’s wider functions, notably
compliance and loan settlements.

Challenges
 To maintain the current, pragmatic, approach to CLO management by launching
progressively more managed CLOs until it reaches the status of a fully active CLO
manager.

 To increase the universe of issuers covered in line with a growing number of loan
investment vehicles under management, while maintaining the quality of analytical work
and the current low ratio of invested issuers to credit analysts.

Company
 DFM is a division of Commerzbank dedicated to European loan investment and
management. It benefits from the wider resources of the bank while functioning as a
segregated entity.

 The bank has been originating and investing in leveraged loans since 1998.

 DFM was effectively formed in 2009 when it became manager of Bosphorous Capital
Limited following the merger of Commerzbank and Dresdner Bank. It has therefore been
investing in and managing loans since 2009. It managed two loan funds and was
responsible for one static CLO at end-December 2015. BIL is 65% external while BCL is
internal money only. The static CLO priced in February 2015.

 DFM is a stand-alone entity within the bank. It is overseen by the Commerzbank head of
leveraged finance.

 DFM has five staff (and one open position), with an average experience of about nine
years. DFM staff perform both analytical and operational activities, although DFM plans to
add additional staff and to separate functions as the business grows.

 The portfolio manager, Guy Beeston, has 21 years' experience in loan investment.

Investments
 The investment process involves three steps, starting with a portfolio manager review,
followed by detailed analytical work and finally presentation to the investment committee
comprising the portfolio manager, the bank's head of leveraged finance and the bank’s
leveraged finance risk officer.

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 Structured Finance

 The credit selection process is based on fundamental, bottom-up financial analysis. The
portfolio manager is responsible for incorporating top-down views into the analysis and in
portfolio construction.

 The credit analysts are generalists, with an average of 18 names per analyst, below the
average among other European CLO managers reviewed by Fitch in Europe. However,
this number has increased over time and Fitch would expect it to increase further as DFM
adds new CLOs.

 Credit research is documented in detailed memos of good quality, with clear credit
recommendations. DFM uses a standardised credit analysis template, with a typical memo
around 10-15 pages in length.

 There were around 70 invested issuers at end-February 2016.

 Binary decisions on issuer eligibility are based solely on credit. Investment committee
decisions are documented and require a unanimous vote. The turndown rate averages
72%.

 DFM uses the bank's internal rating model to generate ratings on invested issuers.

 The portfolio manager is responsible for position sizing, taking into consideration relative
value and diversification. Sales are at the discretion of the portfolio managers.

 Continuous portfolio monitoring via weekly portfolio discussions, monthly analyst updates
on issuer financials and full portfolio review, and annual update of the bank's rating model
and update of the credit analysis. DFM maintains a watchlist of weaker/underperforming
issuers and will typically sell early rather than wait for material underperformance to
emerge.

 DFM avoids work-out situations, preferring to sell early, particularly in light of its relatively
small position sizes. The portfolio manager has work-out experience, however.

Controls
 The risk control framework is sound, driven by the bank's practices and oversight. The
bank maintains an independent risk management staff of 15 relating to leveraged finance,
of which two are dedicated to DFM.

 Commerzbank is authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)

and subject to limited regulation by the UK Financial Conduct Authority and Prudential
Regulation Authority.

 DFM is physically separated from the rest of the bank and operates on a separated file
structure, which gives effective control over information flows and mitigates conflict of
interest risk.

 DFM does not interact with the wider bank save for senior management oversight and the
role of senior bank staff in the credit committee. Risk management is structurally
embedded in the credit process through the permanent presence of the bank’s leveraged
finance risk officer on the credit committee.

 Commerzbank-originated loans make up a minimal portion of DFM's assets under

management. DFM does not use the Commerzbank trading desk, preferring "street"
brokers, indicating an independent approach.

 DFM is effectively public or private only on any name, which mitigates information risk. This
is overseen by compliance, which also maintains a cleansing policy should issuer status
change.

 There is a documented allocation policy and procedures manuals are regularly updated.
 Pre- and post-trade CLO compliance testing is carried out via Wall Street Office (WSO).

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 Structured Finance

 The compliance staff of five related to DFM is based in London. DFM is subject to an
annual compliance review.

 The robust operational risk framework is overseen by the bank's risk and compliance
functions.

 Group internal audit takes place every two years. The most recent, in 2015, identified a
limited number of low-risk findings.

Operations
 CLO administration is conducted by the DFM team directly.

 Cash is reconciled daily and on trading, positions monthly.

 Loan settlement is conducted by a dedicated loan settlement team of seven staff based in
Luxembourg based on standard processes and templates.

 CLO compliance testing is carried out through WSO.

 Trading is performed by portfolio managers rather than a central trading desk. Final sign-off
is subject to multiple-review principles to release funds.

 Aged loan settlements are reviewed and monitored regularly, with defined escalation
procedures.

 No material errors or omissions have been reported.

Technology
 DFM benefits from the bank’s substantial IT resources.

 The main CLO management system is WSO, an industry-standard CLO management and
administration tool. DFM has been using WSO since 2014. It is also used by the trustee,
which supports efficient information flows.

 DFM uses the bank’s proprietary loan rating model.

 Loan price data are sourced from Markit and Bloomberg.

 Detailed business continuity and disaster recovery plans are in place and tested, with off-
site server storage and back-ups.

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 Structured Finance

Appendix C: Priority of Payments

Figure 14
Pre-Enforcement Priorities of Payment
Interest priority of payment Principal priority of payment
1. Taxes, fees and administrative expenses up to the expense cap 1. Taxes, fees and administrative expenses up to the expense cap
2. Senior management fee 2. Senior management fee
3. Class A interest 3. Class A interest
4. Class B interest 4. Class B interest
5. Class A/B coverage tests 5. Class A/B coverage tests
6. Class C interest 6. Class C interest (after senior classes redeemed)
7. Class C deferred interest 7. Class C deferred interest (after senior classes redeemed)
8. Class C coverage tests 8. Class C coverage tests
9. Class D interest 9. Class D interest (after senior classes redeemed)
10. Class D deferred interest 10. Class D deferred interest (after senior classes redeemed)
11. Class D coverage tests 11. Class D coverage tests
12. Class E interest 12. Class E interest (after senior classes redeemed)
13. Class E deferred interest 13. Class E deferred interest (after senior classes redeemed)
14. Class E par value test 14. Class E par value test
15. Class F interest 15. Class F interest (after senior classes redeemed)
16. Class F deferred interest 16. Class F deferred interest (after senior classes redeemed)
17. Class F par value test 17. Class F par value
18. Redeem notes if an effective date rating event occurs 18. Redeem notes if an effective date rating event occurs
19. Unpaid fees and administrative expenses 19. Sequential redemption of the notes
20. Subordinated management fee 20. Unpaid fees and administrative expenses
21. Redeem class F notes (25% of remaining proceeds) 21. Remaining proceeds paid to subordinated notes and incentive
management fee (if incentive management fee IRR threshold is met)
22. Remaining proceeds paid to subordinated notes and incentive
management fee (if incentive management fee IRR threshold is met)
Source: Transaction documents

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 Structured Finance

Appendix D: Par Value Tests

Figure 15
Coverage Tests
Test (%) Trigger Definition
OC
Class A/B 132.30 Adjusted collateral principal amount divided by outstanding principal on class A and B notes
Class C 121.0 Adjusted collateral principal amount divided by outstanding principal on class A,B and C notes
Class D 114.35 Adjusted collateral principal amount divided by outstanding principal on class A,B, C and D notes
Class E 107.75 Adjusted collateral principal amount divided by outstanding principal on class A,B, C, D and E notes
Class F 105.25 Adjusted collateral principal amount divided by outstanding principal on class A,B, C, D, E and F notes
IC
Class A/B 120.0 Interest proceeds and expected interest income minus senior expenses, divided by interest due to classes A and B
Class C 110.0 Interest proceeds and expected interest income minus senior expenses, divided by interest due to classes A, B and C
Class D 105.0 Interest proceeds and expected interest income minus senior expenses, divided by interest due to classes A, B, C and D
Par value EOD
Par value EOD 100.0 Sum of aggregate collateral balance of the collateral portfolio (excluding defaulted assets but including any principal proceeds
standing to the credit of the issuer’s bank accounts) and the MV of all defaulted assets, divided by outstanding principal on
class A
Note: Adjusted collateral principal amount (ACPA) equals aggregate principal balance of assets + principal proceeds in collection accounts. Assets are generally included at
their par value, except for: Deferring and defaulted assets: The lesser of the Fitch recovery amount, S&P’s recovery amount and the MV of such asset. Excess of 7.5% of
aggregate collateral balance of assets rated ‘CCC’ and below: Included at MV. Discount obligations are included at their purchase price
MV  Market Value
Source: Transaction documents

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 Structured Finance

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