NEW YORK--()--Fitch Ratings has taken the following rating actions on notes issued by Hamlet II Ltd./LLC. (Hamlet II):
-- $137,900,000 class A-1 notes affirmed at 'AAAsf'; Outlook Stable;
-- $210,000,000 class A-2a notes affirmed at 'AAAsf'; Outlook Stable;
-- $37,100,000 class A-2b notes affirmed at 'AAAsf'; Outlook Stable;
-- $30,000,000 class B notes upgraded to 'AAsf' from 'Asf'; Outlook revised to Stable from Positive;
-- $85,000,000 subordinated notes upgraded to 'BBBsf' from 'BBB-sf'; Outlook Stable.
The upgrades and affirmations are based on the stable performance of the portfolio combined with the steadily increasing degrees of credit enhancement available to the rated notes. Credit enhancement levels continue to increase as a result of a structural feature that diverts excess interest proceeds to purchase additional collateral rather than paying any amounts to the subordinated notes during the reinvestment period. In Fitch's calculations approximately $84.6 million of interest proceeds that would have otherwise been paid to the subordinated notes has been reinvested since the close of the transaction, including $22.4 million of such proceeds being diverted since Fitch's last rating actions in March 2012. Total collateral par plus principal cash has increased to approximately $570 million as of the Feb. 4, 2013 trustee report from an initial target par amount of $495 million at closing.
As of the most recent trustee report exposure to 'CCC' rated collateral is approximately 1.6%, there are no defaulted assets in the portfolio, and in Fitch's opinion the average credit quality of the portfolio remains in the same range ('B+/B') as at Fitch's last review. The overcollateralization (OC) ratio currently stands at 147.9% compared to a value of 129.1% at the effective date and a 120.6% trigger, while the interest coverage (IC) test is significantly in compliance with a calculated 1344.2% ratio versus a 115% trigger level. All concentration limitations and collateral quality tests are within the permissible limits. Exposure to structured finance assets is capped at 5%, with 2.5% of the portfolio currently invested in such securities primarily in the form of other CLOs.
In November 2012 actions were taken to extend the transaction's reinvestment period by one year. The transaction's reinvestment period will now end in November 2014 as opposed to the original November 2013 scheduled end. As a result of the extension the weighted average life (WAL) trigger was also extended by one year and portfolio trading has led to the current portfolio having a WAL of 5.2 years, similar to the WAL at Fitch's last review, while the maximum permitted WAL is currently 6.25 years.
Due to the extension of the reinvestment period and the ability of the manager to actively turnover the portfolio during the reinvestment period, Fitch analyzed a sensitivity scenario in addition to its analysis of the current characteristics of the collateral portfolio as part of this review. Fitch's sensitivity scenario included extending the risk horizon of the portfolio to the maximum permitted 6.25 years and reducing both the average credit quality and the weighted average spread of the portfolio. The review was conducted under the framework described in the report 'Global Rating Criteria for Corporate CDOs' using the Portfolio Credit Model (PCM) for projecting future default and recovery levels for the underlying portfolio. These default and recovery levels were then utilized in Fitch's cash flow model under various default timing and interest rate stress scenarios, as described in the report 'Global Criteria for Cash Flow Analysis in CDOs'.
Fitch's analysis of the current portfolio, in addition to the sensitivity scenario, showed that the increased credit enhancement provided to the class B notes and the subordinated notes is sufficient to support higher rating levels in line with the upgrades reflected above. The class A-1, class A-2a and class A-2b notes have also benefited from the increased credit enhancement levels and are not expected to experience rating volatility in the near term, which supports Fitch's affirmation and Stable Outlook on these notes.
Hamlet II is a revolving cash flow transaction that closed on Nov. 21, 2006 and is managed by Octagon Credit Investors, LLC. The reinvestment is scheduled to end in November 2014, and the stated maturity of the transaction is in May 2021. The portfolio currently consists of 89.6% senior secured loans with the remainder consisting of senior unsecured bonds, second lien loans, and structured finance assets.
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 information used to assess these ratings was sourced from the periodic trustee reports, note valuation reports, the asset manager, and the public domain.
Applicable Criteria and 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' (Jan. 25, 2013);
-- 'Counterparty Criteria for Structured Finance Transactions' (May 30, 2012).
Applicable Criteria and Related Research:
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