NEW YORK--(BUSINESS WIRE)--Fitch Ratings expects to assign the following rating and Rating Outlook to TCI-Flatiron CLO 2016-1 Ltd./LLC:
--$256,000,000 class A notes 'AAAsf', Outlook Stable.
Fitch does not expect to rate the class B, C, D or E notes or the class I subordinated notes.
TRANSACTION SUMMARY
TCI-Flatiron CLO 2016-1 Ltd. (the issuer) and
TCI-Flatiron CLO 2016-1 LLC (the co-issuer) comprise an arbitrage cash
flow collateralized loan obligation (CLO) that will be effectively
managed by NYL Investors LLC, as sub-advisor to the collateral manager,
TCI Capital Management LLC (a subsidiary of Tetragon Financial Group
Limited and an affiliate of LCM Asset Management LLC). Net proceeds from
the issuance of the secured and subordinated notes will be used to
purchase a portfolio of approximately $400 million of primarily senior
secured leveraged loans. The CLO will have an approximately 4.5-year
reinvestment period and two-year non-call period.
KEY RATING DRIVERS
Sufficient Credit Enhancement: CE of 36% for
class A notes, in addition to excess spread, is sufficient to protect
against portfolio default and recovery rate projections in the 'AAAsf'
stress scenario. Compared to CE levels of recent CLO issuances for notes
in the same respective rating categories, the degree of CE available is
below average for class A notes. Cash flow modeling results indicate
performance in line with other Fitch-rated CLO notes at their respective
ratings.
'B' Asset Quality: The average credit quality of the indicative portfolio is 'B', which is comparable to 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 robust against default rates of up to 59.7%.
Strong Recovery Expectations: The indicative portfolio consists of 98.5% 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, and the base case recovery assumption is 78.5%. In determining the class 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 of higher rating stress assumptions, resulting in a 36.7% recovery rate assumption in Fitch's 'AAAsf' scenario.
RATING SENSITIVITIES
Fitch evaluated 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 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.
Fitch published an exposure draft of its Counterparty Criteria for Structured Finance and Covered Bonds on April 14, 2016. The exposure draft serves as the operative criteria report for this ratings analysis. Under the exposure draft, as well as the issuer's governing documents, a direct support counterparty is expected to maintain a long-term rating of at least 'A' or a short-term rating of at least 'F1' by Fitch in order to support note ratings of up to 'AAAsf'. The issuer's account holder, Deutsche Bank Trust Company Americas (DBTCA; rated 'A-/F1'/Stable), satisfies the minimum expected ratings threshold for a direct-support counterparty under the exposure draft framework.
Fitch's existing counterparty criteria (dated May 14, 2014) expects that a direct counterparty role be fulfilled by an institution with a long-term rating of at least 'A' and a short-term rating of at least 'F1' to support note ratings of up to 'AAAsf'. DBTCA's long-term rating does not meet this expectation. To support note ratings in the 'AAsf' rating category, Fitch's existing counterparty criteria expects this role be fulfilled by an institution with a long-term rating of at least 'A-' and a short-term rating of at least 'F2'. Barring further mitigating factors, if the proposed counterparty criteria is not adopted and the existing counterparty criteria is maintained, we would expect the rating on the class A notes to be in the 'AAsf' category.
The framework regarding expectations for qualified investments has not materially changed between the existing criteria and the exposure draft.
Key Rating Drivers and Rating Sensitivities are further described in the accompanying presale report, which is available to investor's on Fitch's website at 'fitchratings.com'.
VARIATIONS FROM CRITERIA
The rating requirements for most types of
eligible investments that may be purchased with intra-period interest
and principal collections do not conform to Fitch's counterparty
criteria; only provisions for money market funds conform. The criteria
variation from Fitch's 'Exposure Draft: Counterparty Criteria for
Structured Finance and Covered Bonds' arises from the issuer's ability
to invest in eligible investments that do not have a Fitch rating. While
the transaction documents permit this, Fitch expects the ratings of
eligible investments to conform to its counterparty criteria; it will
monitor the eligible investments and may take rating action if
intra-period collections are held in securities that do not satisfy its
criteria.
DUE DILIGENCE USAGE
No third-party due diligence was provided or
reviewed in relation to this rating action.
The publication of a representations, warranties and enforcement mechanisms appendix is not required for this transaction.
Additional information is available at www.fitchratings.com.
Sources of Information:
Sources of information used to assess this
rating were provided by the arranger (Merrill Lynch, Pierce, Fenner &
Smith Incorporated) and the public domain.
TCI-Flatiron CLO 2016-1
Ltd./LLC
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=882171
Applicable Criteria
Counterparty Criteria for Structured Finance
and Covered Bonds (pub. 14 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158
Criteria
for Interest Rate Stresses in Structured Finance Transactions and
Covered Bonds (pub. 17 May 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879815
Exposure
Draft: Counterparty Criteria for Structured Finance and Covered Bonds
(pub. 14 Apr 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878412
Global
Rating Criteria for CLOs and Corporate CDOs (pub. 12 Nov 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873664
Global
Structured Finance Rating Criteria (pub. 06 Jul 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867952
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1005048
Solicitation
Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005048
Endorsement
Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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