CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned the following rating and Rating Outlook to Race Point X CLO, Limited/Corp.:
--$259,000,000 class A notes 'AAAsf'; Outlook Stable.
Fitch does not rate the class B-1, B-2, B-3, C, D, E, F, or subordinated/income notes.
TRANSACTION SUMMARY
Race Point X CLO, Limited (the issuer) and Race Point X CLO, Corp. (the co-issuer) comprise an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by Bain Capital Credit, LP (Bain Capital). 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 four-year reinvestment period and two-year non-call period.
KEY RATING DRIVERS
Sufficient Credit Enhancement: CE of 35.3% for 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 notes is below the average CE of recent 'AAAsf' CLO notes; however, cash flow modeling indicates performance in line with other Fitch-rated 'AAAsf' CLO notes.
'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, in Fitch's opinion, the 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 63.8%.
Strong Recovery Expectations: The indicative portfolio consists of 98.9% first lien senior secured loans. Approximately 92.3% 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 79.2%. 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 for higher rating stress assumptions, resulting in a 38.8% recovery rate assumption in Fitch's 'AAAsf' scenario.
Fitch's "Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds," dated May 2016, includes stresses to address the risk of negative interest rates in structured finance transactions. U.S. CLOs are unlikely to be affected by negative interest rates due to the prevalence of LIBOR floors in the U.S. loan market. Therefore, we applied the standard (positive) interest rate downward stresses in our analysis.
RATING SENSITIVITIES
Fitch evaluated Race Point X CLO, Limited/Corp.'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, 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' in order to support note ratings of up to 'AAAsf'. The issuer's account holder, Wells Fargo, N.A., 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), as well as the issuer's governing documents, expect this role to be fulfilled by an institution with a long-term rating of at least 'A' and a short-term rating of at least 'F1'. Wells Fargo Bank, N.A. has long-term and short-term ratings that currently meet these expectations. Therefore the rating for class A notes remains achievable under Fitch's existing criteria.
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 new issue report, which is available to investor's on Fitch's website at 'fitchratings.com' or by clicking on the link.
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 (Citigroup Global Markets, Inc.) and the public domain.
Race Point X CLO, Limited/Corp.
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=881345
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=1005117
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005117
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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