CHICAGO--(BUSINESS WIRE)--Fitch Ratings assigns the following ratings to Sound Point CLO VI, Ltd./Inc. (Sound Point VI):
-- $4,000,000 Class X notes 'AAAsf'; Outlook Stable;
-- $360,000,000 Class A-1 notes 'AAAsf'; Outlook Stable;
-- $30,000,000 Class A-2 notes 'AAAsf'; Outlook Stable.
Fitch does not rate the class B, C, D, E, F or subordinated notes.
Sound Point CLO VI, Ltd. and Sound Point CLO VI, Inc. (together, Sound Point VI, or the issuer) is an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by Sound Point Capital Management, LP (Sound Point). Net proceeds from the issuance of the secured and subordinated notes will be used to purchase a portfolio of $600 million of primarily leveraged loans. The CLO will have a four-year reinvestment period.
KEY RATING DRIVERS
Sufficient Credit Enhancement (CE): CE of 35.0% for class A-1 and A-2 notes (collectively, the class A notes), in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in an 'AAAsf' stress scenario. Class X notes are ultimately expected to be paid in full from the application of interest proceeds via the interest waterfall.
'B' Asset Quality: The average credit quality of the indicative portfolio is 'B', which is in line with that of recent CLOs. Issuers rated in the 'B' rating category denote a highly speculative credit quality; however, class X and A notes are unlikely to be affected by the foreseeable level of defaults. Class X and A notes display robust projected performance against default rates of up to 100% and 61.7%, respectively.
Strong Recovery Expectations: The indicative portfolio consists of 98.6% first lien senior secured loans. Approximately 97.4% 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 76.5%. In determination of the class X and A note 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. The analysis of Sound Point VI, class X and A notes assumed a 35.4% recovery rate in Fitch's 'AAAsf' scenario.
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. Fitch expects the class X and A notes to remain investment grade even under the most extreme sensitivity scenarios. Results under these sensitivity scenarios ranged between 'A+sf' and 'AAAsf' for the class A notes. The class X notes passed at the 'AAAsf' rating level in all tested sensitivity scenarios.
The sources of information used to assess these ratings were provided by the arranger, Morgan Stanley & Co. LLC, and the public domain.
Key Rating Drivers and Rating Sensitivities are further described in the accompanying new issue report, which will be available shortly to investors on Fitch's website at 'www.fitchratings.com'.
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Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Global Structured Finance Rating Criteria' (Aug. 4, 2014);
--'Global Rating Criteria for Corporate CDOs' (July 25, 2014);
--'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:
Counterparty Criteria for Structured Finance and Covered Bonds
Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds
Global Rating Criteria for Corporate CDOs
Global Structured Finance Rating Criteria