CHICAGO--()--Fitch Ratings has assigned the following expected rating to KVK CLO 2013-1 Ltd. (KVK CLO 2013-1):
--$346,500,000 class A notes 'AAAsf'; Outlook Stable.
Fitch's analysis focused primarily on a Fitch-stressed portfolio, which accounts for many of the worst-case portfolio concentrations permitted by the indenture. Cash flow modeling of the Fitch-stressed portfolio indicated performance in-line with the assigned rating for the class A notes in all 12 of Fitch's standard cash flow scenarios. Fitch also performed multiple sensitivity analyses, including two based on the expected asset quality/spread matrix, and determined the results to be consistent with the rating assigned. Credit enhancement of 37.0% for the class A notes is slightly above the average 'AAAsf'-level credit enhancement seen on most recent CLOs, and the permitted portfolio concentrations are generally in line or slightly more conservative than typical recent CLOs in terms of maximum 'CCC'-rated assets and maximum obligor and industry concentrations, among others.
The primary criteria supporting the rating analysis are 'Global Rating Criteria for Corporate CDOs' dated Aug. 8, 2012 and 'Global Criteria for Cash Flow Analysis in CDOs' dated Sept. 13, 2012.
KVK CLO 2013-1 is an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by Kramer Van Kirk Credit Strategies LP (KVK). Fitch's Funds and Asset Manager Ratings team has evaluated KVK and determined its capabilities to be acceptable for purposes of managing this transaction. Net proceeds from the issuance of the notes will be used to purchase a portfolio of approximately $550 million of leveraged loans. The CLO will have a four-year reinvestment period and a two-year noncall period.
Notable portfolio concentrations specified by the transaction documents include:
--Minimum 90% senior secured loans and principal cash;
--Maximum 10% second lien loans, senior secured bonds, and senior unsecured bonds, collectively;
--Maximum 2% concentration for top 5 senior secured loans; no others greater than 1.5%;
--Maximum 1.5% concentration for top 2 second lien loans; no others greater than 1.0%;
--Maximum 5.0% assets rated 'CCC+' and below (by S&P) and 5.0% rated 'Caa1' and below (by Moody's);
--Maximum 5.0% fixed-rate assets;
--Maximum 40.0% cov-lite loans;
--Maximum industry concentrations: 15.0% for one industry, 12.0% for one industry, and no others > 10%.
Fitch addressed the impact of the most prominent risk-presenting concentration allowances in its analysis of the Fitch-stressed portfolio.
Analysis was conducted on a Fitch-stressed portfolio that was created by Fitch and designed to address the impact of the most prominent risk-presenting concentration allowances and targeted test levels to ensure that the transaction's expected performance is in-line with the rating assigned. The Fitch-stressed portfolio was assumed to be $550 million, 90% of which represented senior secured loans and 10% second lien loans.
Maximum obligor concentrations were assumed for the top five senior secured loans and the top two second lien loans. Fitch also maximized the permitted industry concentrations for the two largest industries and assumed the maximum permitted portfolio weighted average life of eight years when creating the Fitch-stressed portfolio.
The allowable exposure to 'CCC' rated collateral is 5.0% as defined by either S&P or Moody's. Fitch considers 6.4% of the indicative portfolio, which is a portfolio provided by the arranger representing the intended ramped portfolio, to be rated in the 'CCC' category, and therefore did not adjust this percentage in the Fitch-stressed analysis. Fitch assumed 95% of the portfolio to be floating rate and to pay a spread of 4.25% over LIBOR, representing the initial minimum weighted average spread, and 5% to be fixed rate with 7.75% coupons, representing the minimum weighted average coupon, both as represented to Fitch by the arranger (Goldman Sachs & Co.).
Projected default and recovery statistics of the Fitch-stressed portfolio were generated using Fitch's portfolio credit model (PCM). The PCM default rate and recovery rate outputs were 59.4% and 35.2%, respectively, at the 'AAAsf' rating level. The PCM outputs were used as inputs into Fitch's proprietary cash flow model, which was customized to reflect KVK CLO 2013-1's specific transaction structure.
Fitch's cash flow modeling considered 12 stress scenarios to
account for different combinations of four default timings and three interest rate stresses, as described in Fitch's cash flow analysis criteria. The cash flow analysis of the Fitch-stressed portfolio demonstrated that the class A notes passed all 12 stress scenarios at the 'AAAsf' rating level, with a minimum degree of cushion of 4.4% when comparing the breakeven default rate to the PCM default hurdle rate.
Fitch also analyzed the indicative portfolio, which included 97 loans from 93 obligors accounting for 79.9% of the target portfolio amount and 26 unidentified assets with assumed characteristics constituting the remaining 20.1% of the indicative portfolio. The 'AAAsf' PCM default rate of the indicative portfolio was 53.4% and cash flow analysis of the indicative portfolio indicated performance that compared favorably to the Fitch-stressed portfolio analysis, as the minimum breakeven cushion was 12.1% above the PCM default hurdle.
Sensitivity analysis was conducted on the Fitch-stressed portfolio based on the expected characteristics of the asset quality matrix toward which the portfolio will be managed. Fitch analyzed two scenarios: a higher credit quality / lower spread scenario and a lower credit quality / higher spread scenario that are found at the extreme edges of the matrix. The results of these scenarios remained consistent with the assigned ratings. Fitch also conducted its standard sensitivity analysis as described in Fitch's corporate CDO criteria, with the transaction's performance in these scenarios deemed to be within the expectations of the assigned rating.
Fitch will monitor the transaction regularly and as warranted by events with a review. Events that may trigger a review include, but are not limited to, the following:
--OC or IC test breach;
--Breach of concentration limitations or portfolio quality covenants;
--Future 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 Web site at www.fitchratings.com.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
The sources of information used to assess these ratings were the transaction documents provided by the arranger, KVK, and the public domain.
Applicable Criteria & Related Research:
--'Global Structured Finance Rating Criteria' (June 6, 2012);
--'Global Rating Criteria for Corporate CDOs' (Aug. 8, 2012);
--'Global Criteria for Cash Flow Analysis in CDOs' (Sept. 13, 2012);
--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (March 20, 2012);
--'Counterparty Criteria for Structured Finance Transactions' (May 30, 2012).
Applicable Criteria and Related Research: KVK CLO 2013-1 Ltd. -- Appendix
Global Structured Finance Rating Criteria
Global Rating Criteria for Corporate CDOs
Global Criteria for Cash Flow Analysis in CDOs
Criteria for Interest Rate Stresses in Structured Finance Transactions
Counterparty Criteria for Structured Finance Transactions