NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the ratings of Gallatin CLO VI 2013-2, LLC (Gallatin VI) as follows:
--$3,750,000 class X notes 'AAAsf'; Outlook Stable;
--$215,625,000 class A-1 notes 'AAAsf'; Outlook Stable;
--$0 class A-2 notes 'AAAsf'; Outlook Stable;
--$50,000,000 class A loans 'AAAsf'; Outlook Stable;
--$57,375,000 class B notes 'AAsf'; Outlook Stable;
--$19,650,000 class C notes 'Asf'; Outlook Stable;
--$21,250,000 class D notes 'BBBsf'; Outlook Stable;
--$21,250,000 class E notes 'BBsf'; Outlook Stable.
Fitch does not rate the subordinated notes.
KEY RATING DRIVERS
The affirmations are based on the stable performance of the underlying portfolio since the transaction's inception in December 2013, the sufficient credit enhancement available to the notes, and the cushions available in the CLO's cash flow modeling results. As of the October 2014 trustee report, the transaction continues to pass all coverage tests and collateral quality tests, and there have been no defaults in the underlying portfolio to date. Fitch's cash flow analysis also indicates each class of notes is passing all 12 interest rate and default timing scenarios at or above their current rating levels.
The loan portfolio par amount plus principal cash is approximately $425.3 million, compared to the effective date target balance of $425 million. The current weighted average spread (WAS) is 4.2% versus a minimum WAS trigger of 3.8%, as reported by the trustee. Additionally, the weighted average rating factor remains unchanged at 'B' since the closing date. Fitch currently considers 1.9% of the collateral assets to be rated in the 'CCC' category versus 5.7% in the indicative portfolio at closing, based on Fitch's Issuer Default Rating (IDR) Equivalency Map.
The Stable Outlook on each class of notes of Gallatin VI reflects the expectation that the notes have sufficient levels of credit protection to withstand potential deterioration in the credit quality of the portfolio.
The ratings of the notes may be sensitive to the following: asset defaults, portfolio migration, including assets being downgraded to 'CCC', portions of the portfolio being placed on Rating Watch Negative, overcollateralization or interest coverage (IC) test breaches, or breach of concentration limitations or portfolio quality covenants. Fitch conducted rating sensitivity analysis on the closing date of Gallatin VI, incorporating increased levels of defaults and reduced levels of recovery rates, among other sensitivities.
Gallatin VI is an arbitrage cash flow collateralized loan obligation (CLO) that is managed by MP Senior Credit Partners L.P., with a four-year reinvestment period and two-year non-call period. During the reinvestment period, discretionary sales are permitted at any time and are limited to 25% of the portfolio balance, as measured at the beginning of the preceding 12-month period. The manager also has the ability to reinvest unscheduled principal proceeds and sales proceeds from the disposal of credit risk obligations after the reinvestment period, subject to certain conditions.
The class A loans were issued at close and include a conversion option to be converted into class A-2 notes. Once the option is exercised, the aggregate outstanding amount of the class A-2 notes will be increased by the outstanding principal amount of the class A loans and the class A loans shall cease to be outstanding. The conversion option may be exercised only once and no class A-2 notes may be converted into class A loans. The class A-2 notes continue to have a zero balance.
This review was conducted under the framework described in the report 'Global Rating Criteria for Corporate CDOs' using Fitch's Portfolio Credit Model (PCM) to project 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 combinations of default timing and interest rate stress scenarios, as described in the report. The cash flow model was customized to reflect the transaction's structural features.
The current portfolio's 'AAAsf' Rating Default Rate (RDR) and Rating Recovery Rate (RRR) outputs from PCM (the stress used to achieve a 'AAAsf' rating on the class A debt) are 50.3% and 41.7%, respectively, versus an RDR of 52.6% and RRR of 43.3% for the indicative portfolio at closing. The RDR decreases to 31.4% and the RRR increases to 71.7% at the 'BBsf' stress (the stress used to achieve a 'BBsf' rating on the class E notes) versus an RDR of 33.1% and RRR of 73.4% for the indicative portfolio at closing.
Initial Key Rating Drivers and Rating Sensitivity are further described in the New Issue Report published on Apr. 8, 2014. A comparison of the transaction's Representations, Warranties, and Enforcement Mechanisms (RW&Es) to those of typical RW&Es for that asset class is also available by accessing the reports and links indicated below.
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' (Jul. 25, 2014);
--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (Jan. 23, 2014);
--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 14, 2014);
--'Gallatin CLO VI 2013-2, LLC New Issue Report' (Apr. 8, 2014);
--'Gallatin CLO VI 2013-2, LLC - Appendix' (Nov. 20, 2013).
Applicable Criteria and Related Research:
Gallatin CLO VI 2013-2, LLC - Appendix
Gallatin CLO VI 2013-2, LLC
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