NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the class A notes issued by Sound Point CLO IV, Ltd/Inc. (Sound Point IV) at 'AAAsf'. The Rating Outlook remains Stable.
KEY RATING DRIVERS
The affirmation is based on the stable performance of the underlying portfolio since the transaction closed in December 2013 and the stable credit enhancement available to the notes. As of the Nov. 9, 2014 trustee report, the transaction continues to pass all of its coverage tests and collateral quality tests, and there are no defaults in the underlying portfolio.
The loan portfolio par amount plus principal cash is approximately $602.5 million, compared to the effective date target balance of $600 million. The minimum required weighted average spread (WAS) trigger is 4.0%, versus a current WAS of 4.8%, as reported by the trustee. Additionally, the weighted average rating factor is at 'B+/B', in line with the level at closing. Fitch considers 3.1% of the collateral assets to be rated in the 'CCC' category versus 4.5% at closing, based on Fitch's Issuer Default Rating (IDR) Equivalency Map. Currently, 89.6% of the portfolio has strong recovery prospects or a Fitch-assigned Recovery Rating of 'RR2' or higher.
The Stable Outlook reflects the expectation that the class A notes have a sufficient level of credit protection to withstand potential deterioration in the credit quality of the portfolio, based on the results of the Fitch sensitivity analysis described below.
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 (OC) 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 Sound Point IV, incorporating increased levels of defaults and reduced levels of recovery rates, among other sensitivities.
Sound Point CLO IV, Ltd. (the issuer) and Sound Point CLO IV, Inc. (the co-issuer) is an arbitrage cash flow collateralized loan obligation (CLO) that closed on Dec. 17, 2013 and is managed by Sound Point Capital Management, LP. Net proceeds from the issuance of the secured and subordinated notes were used to purchase a portfolio of $600 million of primarily leveraged loans. The CLO has a four-year reinvestment period.
This 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. Given the stable performance of the deal since closing in December 2013, no updated cash flow modeling was completed. The current portfolio's 'AAAsf' Rating Default Rate (RDR) and Rating Recovery Rate (RRR) outputs from PCM are 48.4% and 36.8%, respectively, versus an RDR of 51.2% and RRR of 38.5% for the indicative portfolio at closing.
Initial Key Rating Drivers and Rating Sensitivity are further described in the New Issue Report published on April 9, 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.
Fitch has affirmed the following rating:
--$390,000,000 class A notes at 'AAAsf'; Outlook Stable.
Fitch does not rate the class B, C, D, E, F or Subordinated Notes.
Additional information is available at 'www.fitchratings.com'.
The information used to assess these ratings was sourced from periodic servicer reports, note valuation reports, and the public domain.
Applicable Criteria & Related Research:
--'Global Structured Finance Rating Criteria' (August 4, 2014);
--'Global Rating Criteria for Corporate CDOs' (July 25, 2014);
--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 14, 2014);
--'Sound Point CLO IV, Ltd/Inc. New Issue Report' (Apr. 09, 2014);
--'Sound Point CLO IV, Ltd/Inc. - Appendix' (Apr. 09, 2014).
Applicable Criteria and Related Research:
Sound Point CLO IV, Ltd/Inc. - CLO Indenture Abstract
Sound Point CLO IV, Ltd/Inc. -- Appendix
Counterparty Criteria for Structured Finance and Covered Bonds
Global Rating Criteria for Corporate CDOs
Global Structured Finance Rating Criteria