Fitch Rates Galaxy XXII CLO, Ltd./LLC

NEW YORK--()--Fitch Ratings has assigned the following ratings and Rating Outlooks to Galaxy XXII CLO, Ltd./LLC:

--$223,000,000 class A-1 notes 'AAAsf', Outlook Stable;
--$33,400,000 class A-2 notes 'AAAsf', Outlook Stable;
--$41,800,000 class B-1 notes 'AAsf', Outlook Stable;
--$3,000,000 class B-2 notes 'AAsf', Outlook Stable.

Fitch does not rate the class C-1, C-2, D, E-1, E-2, or F notes or the class A and class B subordinated notes.

TRANSACTION SUMMARY

Galaxy XXII CLO, Ltd. (the issuer) and Galaxy XXII CLO, LLC (the co-issuer) together comprise an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by PineBridge Investments 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 four-year reinvestment period and a two-year noncall period.

KEY RATING DRIVERS

Sufficient Credit Enhancement: Credit enhancement (CE) of 35.9% for the class A-1 and A-2 notes (collectively, class A notes) and 24.7% for the class B-1 and B-2 notes (collectively, class B notes), in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in the 'AAAsf' and 'AAsf' stress scenarios, respectively. The degree of CE available to class A and B notes are in line with the average CE of recent 'AAAsf' and 'AAsf' CLO notes, respectively.

'B+/B' Asset Quality: The average credit quality of the indicative portfolio is '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 and B notes are unlikely to be affected by the foreseeable level of defaults. Class A and B notes are projected to be able to withstand default rates of up to 63.6% and 54.5%, respectively.

Strong Recovery Expectations: The indicative portfolio consists of 97.6% first-lien senior secured loans. Approximately 86.8% 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 79.4%. In determining the class A and B 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 stresses, resulting in 39.3% and 47.4% recovery rates in Fitch's 'AAAsf' and 'AAsf' scenarios, respectively.

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 and B notes to remain investment grade, even under the most extreme sensitivity scenarios. Results under these sensitivity scenarios ranged between 'AA-sf' and 'AAAsf' for the class A notes and between 'BB+sf' and 'AA+sf' for the class B 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, U.S. Bank National Association, satisfies the minimum expected ratings threshold for a direct support counterparty under the exposure draft framework.

Fitch's existing counterparty criteria (dated May 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'. U.S. Bank's long-term and short-term ratings currently meet these expectations. Therefore, the ratings for the class A and B notes remain achievable under Fitch's existing criteria.

The framework regarding expectations for eligible investments has not materially changed between the existing criteria and the exposure draft.

DUE DILIGENCE USAGE

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

Click on the link below for an analysis of the representations, warranties, and enforcement mechanisms available to investors in transaction documents for this transaction and how they compare to those of similar securities.

Additional information is available at www.fitchratings.com.

Sources of Information:
The information used to assess these ratings was provided by the arranger (Goldman, Sachs & Co.) 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

Related Research
Galaxy XXII CLO, Ltd./LLC -- Appendix
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=882782

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1008922
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008922
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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Contacts

Fitch Ratings
Primary Analyst
John Um, CFA
Director
+1-212-908-0287
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Joseph Farfsing
Associate Director
+1-312-368-3346
or
Committee Chairperson
Alina Pak
Senior Director
+1-312-368-3184
or
Media Relations
Sandro Scenga, New York, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
John Um, CFA
Director
+1-212-908-0287
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Joseph Farfsing
Associate Director
+1-312-368-3346
or
Committee Chairperson
Alina Pak
Senior Director
+1-312-368-3184
or
Media Relations
Sandro Scenga, New York, +1 212-908-0278
sandro.scenga@fitchratings.com