NEW YORK--(BUSINESS WIRE)--Fitch Ratings expects to assign the following ratings to Octagon Investment Partners XXIII, Ltd./LLC:
--$193,800,000 class A-1 notes 'AAAsf'; Outlook Stable;
--$193,800,000 class A-2 notes 'AAAsf'; Outlook Stable.
Fitch does not expect to rate the class B, C, D, E-1, E-2, F, subordinated or delayed draw notes.
Octagon Investment Partners XXIII, Ltd. (the issuer) and Octagon Investment Partners XXIII, LLC (the co-issuer) together comprise an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by Octagon Credit Investors, LLC (Octagon). Net proceeds from the issuance of the secured and subordinated notes will be used to purchase a portfolio of approximately $600 million primarily senior secured leveraged loans. The CLO will have a four-year reinvestment period and a 1.3-year noncall period.
KEY RATING DRIVERS
Sufficient Credit Enhancement: Credit enhancement (CE) of 35.4% 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 a 'AAAsf' stress scenario. The degree of CE available to class A-1 notes is below the average CE of recent CLO issuances, but cash flow analysis shows that the projected performance of class A notes is in line with other Fitch rated CLOs.
'B+/B' Asset Quality: The average credit quality of the indicative portfolio is 'B+/B,' which is in line with recent CLOs. Issuers rated in the 'B' rating category denote a highly speculative credit quality; however, in Fitch's opinion, class A notes are unlikely to be affected by the foreseeable level of defaults. Class A notes are projected to be able to withstand default rates of up to 58.4%.
Strong Recovery Expectations: The indicative portfolio consists of 93.4% senior secured loans. Approximately 89% of the indicative portfolio has strong recovery prospects or a Fitch-assigned Recovery Rating of 'RR2' or higher and the base case recovery assumption is 74.9%. In determining ratings for class A notes, 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 stresses resulting in a 35.1% recovery rate assumption in Fitch's 'AAAsf' scenario.
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 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.
Key Rating Drivers and Rating Sensitivities are further described in the accompanying presale report.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
The publication of a RW&Es appendix is not required for this transaction.
Additional information is available at www.fitchratings.com.
Sources of Information:
Sources of information used to assess these ratings were provided by the arranger, Wells Fargo Securities, LLC and the public domain. The expected ratings are based on information provided to Fitch as of June 15, 2015.
Octagon Investment Partners XXIII, Ltd./LLC
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)
Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 19 Dec 2014)
Global Rating Criteria for Corporate CDOs (pub. 25 Jul 2014)
Global Structured Finance Rating Criteria (pub. 31 Mar 2015)
Dodd-Frank Rating Information Disclosure Form