NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned the following rating to TCI-Flatiron CLO 2016-1 Ltd./LLC:
--$256,000,000 class A notes 'AAAsf'; Outlook Stable.
Fitch does not rate the class B, C, D, or E notes or class I subordinated notes.
TRANSACTION SUMMARY
TCI-Flatiron CLO 2016-1 Ltd. (the issuer) and TCI-Flatiron CLO 2016-1 LLC (the co-issuer) together comprise an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by TCI Capital Management LLC (a subsidiary of Tetragon Financial Group Limited and an affiliate of LCM Asset Management LLC). The sub-advisor who will perform all day to day management will be NYL Investors 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 a 2.5-year noncall period.
KEY RATING DRIVERS
Sufficient Credit Enhancement: Credit enhancement (CE) of 36.0% for the 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 the class A notes is in line with the average CE of recent CLO issuances.
'B+/B' Asset Quality: The average credit quality of the indicative portfolio is approximately 'B+/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, the class A notes are unlikely to be affected by the foreseeable level of defaults. The class A notes are projected to be able to withstand default rates of up to 60.9%.
Strong Recovery Expectations: The indicative portfolio consists of 98.6% first-lien senior secured loans. Approximately 89.9% 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 80.1%. In determination of the class A notes 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. The analysis of the class A notes assumed a 38.1% recovery rate in Fitch's 'AAAsf' scenario.
RATING SENSITIVITIES
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, with results under these sensitivity scenarios ranging between 'A+sf' and 'AAAsf'.
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 Outlook), 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' rating 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 new issue report, which will be available shortly 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.
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. 09 Jun 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=882840
Global Structured Finance Rating Criteria (pub. 27 Jun 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=883130
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1008577
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008577
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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