Fitch to Rate Ares XXXI CLO Ltd./LLC; Issues Presale

CHICAGO--()--Fitch Ratings expects to assign the following ratings and Rating Outlooks to Ares XXXI CLO Ltd./LLC:

--$759,900,000 class A-1 notes 'AAAsf'; Outlook Stable;

--$136,900,000 class A-2 notes 'AAsf'; Outlook Stable;

--$75,700,000 class B notes 'Asf'; Outlook Stable;

--$46,250,000 class C notes 'BBBsf'; Outlook Stable;

--$57,500,000 class D notes 'BBsf'; Outlook Stable.

Fitch does not expect to rate the subordinated notes.

TRANSACTION SUMMARY

Ares XXXI CLO Ltd. and Ares XXXI CLO LLC (together, Ares XXXI, or the issuer) comprise an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by Ares CLO Management XXXI, L.P., a wholly owned subsidiary of Ares Management LLC (Ares Management). Net proceeds from the issuance of the secured and subordinated notes will be used to purchase a portfolio of approximately $1.25 billion of primarily senior-secured leveraged loans. The CLO will have a four-year reinvestment period and a two-year non-call period.

KEY RATING DRIVERS

Sufficient Credit Enhancement: Credit enhancement (CE) available to the notes, in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in the respective rating stress scenarios. The level of CE for each class of notes is above the average CE for notes in the same respective rating categories in recent CLO issuances.

'B' Asset Quality: The average credit quality of the indicative portfolio is approximately 'B', which is comparable to recent CLOs. Issuers rated in the 'B' rating category denote relatively weak credit quality; however, in Fitch Ratings' opinion, each class of rated notes is projected to perform with sufficient robustness against default rates commensurate with its applicable rating stress.

Strong Recovery Expectations: The indicative portfolio consists of 96.1% first-lien senior-secured loans. Approximately 89.1% of the indicative portfolio has either strong recovery prospects or a Fitch-assigned recovery rating of 'RR2' or higher, resulting in a base case recovery assumption of 76.3%. In determining the notes' ratings, Fitch stressed the indicative portfolio by assuming a higher portfolio concentration of assets with lower recovery prospects and further reduced recovery assumptions for higher rating stress assumptions. For example, the analysis of the class A-1 notes assumed a 36.9% recovery rate in Fitch's 'AAAsf' scenario.

Consistent Portfolio Parameters: The concentration limitations and collateral quality test levels 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 the Fitch stressed portfolio analysis.

RATING SENSITIVITIES

Fitch evaluated the structure's sensitivity to the potential variability of key model assumptions, including decreases in recovery rates and increases in default rates or correlation. Fitch expects the class A-1 and class A-2 notes to remain investment grade, while classes B, C, and D are generally expected to remain within two rating categories, even under the most extreme sensitivity scenarios. Results under these sensitivity scenarios ranged between 'AA-sf' and 'AAAsf' for the class A-1 notes, between 'BBBsf' and 'AAAsf' for the class A-2 notes, between 'BBsf' and 'AA+sf' for the class B notes, between 'B-sf' and 'AA-sf' for the class C notes, and between a level below 'CCCsf' and 'BBB+sf' for the class D notes. The results of these scenarios remain consistent with the assigned ratings.

The expected ratings are based on information provided to Fitch as of July 24, 2014. Sources of information used to assess these ratings were provided by the arranger, J.P. Morgan Securities LLC, and the public domain.

Key Rating Drivers and Rating Sensitivities are further detailed in the accompanying presale report, available at 'www.fitchratings.com' or by clicking on the link.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria & Related Research:

--'Global Structured Finance Rating Criteria' (May 20, 2014);

--'Global Rating Criteria for Corporate CDOs' (Aug. 8, 2013);

--'Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds' (Jan. 23, 2014);

--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 14, 2014).

Applicable Criteria and Related Research: Ares XXXI CLO Ltd./LLC (US Structured Credit)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753024

Global Structured Finance Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748821

Global Rating Criteria for Corporate CDOs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715492

Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725537

Counterparty Criteria for Structured Finance and Covered Bonds

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=841455

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Robert Rhein, +1 312-606-2314
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Joseph Farfsing, +1 312-368-3346
Associate Director
or
Committee Chairperson
Derek Miller, +1 312-368-2076
Senior Director
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Robert Rhein, +1 312-606-2314
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Joseph Farfsing, +1 312-368-3346
Associate Director
or
Committee Chairperson
Derek Miller, +1 312-368-2076
Senior Director
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com