NEW YORK--(BUSINESS WIRE)--Fitch Ratings expects to assign the following ratings to Washington Mill CLO Ltd./LLC (Washington Mill):
-- $3,500,000 class X senior floating rate notes 'AAAsf', Outlook Stable;
-- $295,000,000 class A-1 senior floating rate notes 'AAAsf', Outlook Stable;
-- $18,750,000 class A-2 senior fixed rate notes 'AAAsf', Outlook Stable.
Washington Mill CLO Ltd. (the issuer) and Washington Mill CLO LLC (the co-issuer) represent an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by Shenkman Capital Management, Inc. (Shenkman). Net proceeds from the issuance of the secured and subordinated notes will be used to purchase a portfolio of approximately $500 million of primarily senior secured leveraged loans. The CLO will have a four-year reinvestment period and a two-year noncall period.
KEY RATING DRIVERS
Sufficient Credit Enhancement: Credit enhancement (CE) of 37.3% for class A-1 and A-2 (together class A) notes, in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in the 'AAAsf' stress scenario. The level of CE for class A notes is in line with the average for recent CLO issuances. Class X notes are expected to be paid in full from interest proceeds within 1.5 years of close.
'B' Asset Quality: The average credit quality of the indicative portfolio is 'B', which is comparable to recent CLOs. Issuers rated in the 'B' rating category denote relatively weak credit quality; however, in Fitch's opinion, class X and A notes are unlikely to be affected by the foreseeable level of defaults. Class X and A notes are robust against default rates of up to 86.7% and 65.1%, respectively.
Strong Recovery Expectations: The indicative portfolio consists of 95% senior secured loans, of which about 91.2% have strong recovery prospects or a Fitch-assigned Recovery Rating of 'RR2' or higher. This is in line with the seniority profile of recently issued CLO transactions.
Consistent Portfolio Parameters: The portfolio will be actively managed and bound by eligibility criteria, or concentration limitations, addressing various loan characteristics. The concentration limitations presented to date are within the range of limits set in the majority of recent CLOs. Fitch addressed the impact of the most prominent risk-presenting concentration allowances.
In addition to Fitch's stated criteria, the agency analyzed the structure's sensitivity to the potential variability of key model assumptions including decreases in weighted average spread or recovery rates and increases in default rates or correlation. The class X notes are expected to remain 'AAAsf', and the class A notes are expected to remain investment grade even under the most extreme sensitivity scenarios. Results under these sensitivity scenarios ranged between 'AA-sf' and 'AAAsf' for the class A notes.
The expected ratings are based on information provided to Fitch by the arranger, Merrill Lynch, Pierce, Fenner & Smith Incorporated as of April 11, 2014. Key Rating Drivers and Rating Sensitivities are further described in the accompanying presale report.
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Applicable Criteria & Related Research:
-- 'Global Structured Finance Rating Criteria' (May 24, 2013);
-- 'Global Rating Criteria for Corporate CDOs' (Aug. 8, 2013);
-- 'Criteria for Interest Rate Stresses in Structured Finance Transactions' (Jan. 23, 2014);
-- 'Counterparty Criteria for Structured Finance and Covered Bonds' (May 13, 2013).
Applicable Criteria and Related Research: Washington Mill CLO Ltd./LLC
(US Structured Credit)
Global Structured Finance Rating Criteria
Global Rating Criteria for Corporate CDOs
Criteria for Interest Rate Stresses in Structured Finance Transactions
Counterparty Criteria for Structured Finance and Covered Bonds