Fitch Rates Magnetite VII, Ltd./Corp.'s Refinancing Notes

NEW YORK--()--Fitch Ratings has assigned an 'AAAsf' rating to the class A-1-R notes issued by Magnetite VII, Ltd./Corp. The Rating Outlook is Stable. Fitch does not rate the class A-2-R, B-R, C-R, D-R and subordinated notes.

TRANSACTION SUMMARY

Magnetite VII, Ltd./Corp. issued class A-1-R, A-2-R, B-R, C-R and D-R notes (collectively, the refinancing notes) and applied the net issuance proceeds thereof to redeem the class A-1A, A-1B, A-2A, A-2B, B, C and D notes at par plus accrued interest on the refinancing date of Oct. 17, 2016. Fitch originally rated only the class A-1A and A-1B notes.

The refinancing notes have the same terms as the previously outstanding classes except that the stated coupons have changed. All of the refinancing notes pay floating coupons. Spreads over LIBOR on the class A-1-R, A-2-R, B-R, C-R and D-R notes are 1.35%, 1.75%, 2.33%, 3.75% and 7.00%, respectively. The subordinated notes were not refinanced.

The refinancing amendment extended the reinvestment period by two years (ending January 2019), reset the non-call period to approximately two years (ending January 2018) and reset the maximum weighted average life (WAL) test to six years. The amendment also decreased the subordinated collateral management fee to 0.175% per year from 0.30% per year. The class A-1R notes may no longer be refinanced individually, and proceeds from prepayments and credit risk sales after the reinvestment period may now be reinvested if the WAL test is not satisfied, as long as the test is maintained or improved.

KEY RATING DRIVERS

Sufficient Credit Enhancement: Credit enhancement (CE) of 37.6% for the class A-1-R notes, in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in an 'AAAsf' stress scenario. The degree of CE available to the class A-1-R notes is above the average CE levels typically seen on like-rated tranches of recent CLO issuances backed by broadly syndicated loans.

'B+/B' Asset Quality: The average credit quality of the Fitch stressed portfolio is 'B+/B', which is comparable with recent CLOs. Issuers rated in the 'B' rating category denote a highly speculative credit quality; however, in Fitch's opinion, class A-1-R notes are unlikely to be affected by the foreseeable level of defaults. The class A-1-R notes are projected to be able to withstand default rates of up to 63.9%.

Strong Recovery Expectations: The current portfolio (excluding cash) consists of 97.3% first lien senior secured loans. Approximately 90.9% of the portfolio has either strong recovery prospects or a Fitch-assigned Recovery Rating of 'RR2' or higher, resulting in a base case recovery assumption of 81.4%. In determining the class A-1-R notes' rating, Fitch stressed the current portfolio by assuming a higher portfolio concentration of assets with lower recovery prospects and further reduced recovery assumptions for higher rating stresses, resulting in a 39.4% recovery rate in Fitch's 'AAAsf' scenario.

The current portfolio, when including a negative cash balance of approximately $1.8 million, totals approximately $596.2 million as of the August 2016 trustee report. All collateral quality tests, concentration limitations, and coverage tests are in compliance, and there are no defaulted assets in the portfolio. The current weighted average spread (WAS) is 3.80% versus a minimum WAS trigger of 3.75%. The current WAL is 4.6 years, and the weighted average Fitch rating of the portfolio is 'B+/B'. Fitch currently considers 5.7% of the collateral assets to be rated in the 'CCC' category, based on Fitch's Issuer Default Rating (IDR) Equivalency Map. Additionally, second lien loans represent 2.7% of the current portfolio, as compared to a permitted 10% limitation.

FITCH ANALYSIS

Fitch's analysis focused on the Fitch stressed portfolio (FSP), given the reset terms of the transaction and the manager's ability to reinvest principal proceeds during the extended reinvestment period. As a result, cash flow model analysis was conducted for the refinancing.

The FSP consisted of approximately $596.2 million of loans and included the following assumptions:

- 90% senior secured loans and 10% second-lien loans;

- Maximum concentrations for the five largest obligors;

- Maximum concentrations for the three largest industries;

- 7.5% 'CCC' rated collateral obligations;

- Six-year WAL;

- 95% floating-rate assets earning a WAS of 3.75% over LIBOR (per the targeted WAS trigger indicated by the arranger) and 5% fixed-rate assets earning a weighted average coupon (WAC) of 7.50%;

- 5% of the underlying assets pay interest semi-annually.

For additional details on the transaction, including its other concentration limitations, please refer to the New Issue Report published on Jan. 18, 2013, available on www.fitchratings.com.

Projected default and recovery statistics of the FSP were generated using Fitch's portfolio credit model (PCM). The PCM default rate and recovery rate outputs for FSP at the 'AAAsf' rating stress were 50.3% and 39.4%, respectively.

Fitch's cash flow modeling considered nine stress scenarios to account for different combinations of three default timings and three interest rate stresses. In the analysis of the FSP, the class A-1-R notes passed the 'AAAsf' PCM hurdle rate in all nine stress scenarios with a minimum cushion of 13.6%. Fitch was comfortable assigning an 'AAAsf' rating to the class A-1-R notes because we believe the notes can sustain a robust level of defaults, combined with low recoveries, as well as other factors such as strong performance of the notes in the sensitivity scenarios. The Stable Outlook on the class A-1-R notes reflects the expectation that the notes have a sufficient level of credit protection to withstand potential deterioration in the credit quality of the portfolio.

RATING SENSITIVITIES

Fitch evaluated the class A-1-R notes' sensitivity to the potential variability of key model assumptions including decreases in recovery rates and increases in default rates or correlation. Fitch also conducted an additional sensitivity scenario, assuming that the weighted average spread over LIBOR of the portfolio decreases to 2.0% over the next two years. Fitch expects the class A-1-R notes to remain within one category of their original rating even under the most extreme sensitivity scenarios. Results under these sensitivity scenarios ranged between 'AAAsf' and 'AA+sf' for the class A-1-R notes. The results of the sensitivity analysis further contributed to Fitch's assignment of a Stable Outlook to the class A-1-R notes.

DUE DILIGENCE USAGE

Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.

REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS

A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool was not prepared for this refinancing. Offering documents for U.S. CLO transactions do not typically include RW&Es that are available to investors and that relate to the asset pool underlying the security. Therefore, Fitch credit reports for U.S. CLO transactions will not typically include descriptions of RW&Es. For further information, please see Fitch's Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions,' dated May 31, 2016.

Fitch has assigned the following rating:

--$372,000,000 class A-1-R notes 'AAAsf; Outlook Stable.

Fitch does not rate the class A-2-R, B-R, C-R, D-R and subordinated notes.

Additionally, the following classes are 'Paid-in-Full' (PIF):

--$360,000,000 class A-1A notes 'PIF';

--$12,000,000 class A-1B notes 'PIF'.

Sources of Information:

Sources of information used to assess this rating were provided by the arranger (Citigroup Global Markets Inc.), periodic trustee reports and the public domain.

Additional information is available at www.fitchratings.com.

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01 Sep 2016)

https://www.fitchratings.com/site/re/886006

Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 17 May 2016)

https://www.fitchratings.com/site/re/879815

Global Rating Criteria for CLOs and Corporate CDOs (pub. 09 Sep 2016)

https://www.fitchratings.com/site/re/887497

Global Structured Finance Rating Criteria (pub. 27 Jun 2016)

https://www.fitchratings.com/site/re/883130

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013262

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013262

Endorsement Policy

https://www.fitchratings.com/regulatory

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+1-212-908-0603
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or
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+1-312-368-5434
or
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or
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Contacts

Fitch Ratings
Primary Analyst
Christine Yoon
Senior Director
+1-212-908-0603
Fitch Ratings, Inc.
30 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Dhruvish Shah
Analyst
+1-312-368-5434
or
Committee Chairperson
Robert Rhein
Senior Director
+1-312-606-2314
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com