Fitch Affirms WhiteHorse VII, Ltd.; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the class A-1L, A-2L and A-3L notes issued by WhiteHorse VII, Ltd. (WhiteHorse VII). A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The affirmations are based on credit enhancement (CE) and cushions available to the notes in Fitch's cash flow analysis. The loan portfolio par amount plus the principal collections cash amount is $398.5 million, resulting in a decrease in credit enhancement from the last review in June 2015. However, Fitch's cash flow analysis indicates class A-1L, A-2L and A-3L notes remain protected against losses corresponding to their current rating levels through credit enhancement and excess spread.

According to the May 2016 trustee report, the transaction continues to pass all coverage tests and collateral quality tests. The weighted average rating of the performing portfolio (excluding defaulted assets and principal cash) remains at 'B/B-'. The transaction is currently failing the concentration limitation for assets with a Moody's Default Probability rating of Caa1 or below at 11%, relative to a trigger of 7.5%, while passing the limitation for assets with an S&P rating of 'CCC+' or below at 7.2%, relative to a trigger of 7.5%. Fitch currently considers 20% of the performing portfolio to be rated in the 'CCC' category, based on Fitch's Issuer Default Rating (IDR) Equivalency Map.

Approximately 92.3% of the performing portfolio has strong recovery prospects or a Fitch assigned Recovery Rating of 'RR2' or higher. Five obligors, comprising approximately 2.6% of the portfolio (including principal cash), are reported to be in default by the trustee. The weighted average spread (WAS) is reported at 4.55%, relative to the minimum trigger level of 4.49%.

This review was conducted under the framework described in the report 'Global Rating Criteria for CLOs and Corporate CDOs' using the Portfolio Credit Model (PCM) for projecting 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. Due to the negative credit migration of the portfolio and losses of par coverage on the class A-3L notes, Fitch performed cash flow model analysis on the current portfolio and stressed portfolio under the sensitivity scenario described below.

Fitch's cash flow analysis indicates each class of notes continues to pass all nine interest rate and default timing scenarios above their current rating levels. However, no upgrade is warranted while the transaction remains in reinvestment.

Given the results of the sensitivity scenario, the ratings of the A-1L, A-2L, and A-3L notes are not expected to experience rating volatility in the near term, supporting their Stable Outlook.

RATING SENSITIVITIES

The ratings of the notes may be sensitive to asset defaults, significant negative credit migration, and lower than historically observed recoveries for defaulted assets.

Fitch ran a sensitivity scenario by applying a combined stress of increased default probabilities and lower recovery assumptions on the current portfolio by lowering the rating of obligors in the commodity (energy, oil and gas and metals & mining) and retail sectors by one notch and one rating category, respectively, and applying a 75% multiplier (i.e. 25% haircut) on loan-level recovery rates on the affected sectors in PCM. The three classes of notes performed at or above their current ratings.

Initial Key Rating Drivers and Rating Sensitivities are further described in Fitch's New Issue Report published Nov. 4, 2013.

WhiteHorse VII is an arbitrage, cash flow collateralized loan obligation (CLO) managed by H.I.G. WhiteHorse Capital, LLC. The transaction closed in October 2013 and remains in its reinvestment period, which is scheduled to end in November 2017.

DUE DILIGENCE USAGE

No third-party due diligence was reviewed in relation to this rating action.

Fitch has affirmed the following ratings:

--$238,800,000 class A-1L notes at 'AAAsf'; Outlook Stable;

--$52,400,000 class A-2L notes at 'AAsf'; Outlook Stable;

--$31,200,000 class A-3L notes at 'A-sf'; Outlook Stable.

Fitch does not rate the class B-1L, B-2L, B-3L and subordinated notes.

Additional information is available at www.fitchratings.com.

Sources of Information:

The information used to assess these ratings was sourced from periodic servicer reports, note valuation reports, and the public domain.

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

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

Related Research

WhiteHorse VII, Ltd. -- Appendix

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=721981

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1005661

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005661

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Surveillance Analyst
Christine Yoon
Senior Director
+1-212-908-0603
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Committee Chairperson
Alina Pak, CFA
Senior Director
+1-312-368-3184
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Surveillance Analyst
Christine Yoon
Senior Director
+1-212-908-0603
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Committee Chairperson
Alina Pak, CFA
Senior Director
+1-312-368-3184
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com