NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AAAsf' rating to the class A-R notes issued by California Street CLO IX Limited Partnership/LLC (f/k/a Symphony CLO IX Limited Partnership/LLC). The Rating Outlook is Stable.
California Street CLO IX Limited Partnership/LLC issued refinancing obligations as class A-R notes, class B-R notes, class C-R notes, class D-R notes and class E-R notes, (collectively, the refinancing notes) and applied the net proceeds thereof to redeem the existing class A, B, C, D and E notes, respectively, at par (plus accrued interest) on the refinancing date of Oct. 17, 2016. The LP Certificates were not refinanced. The portfolio will continue to be managed by Symphony Asset Management LLC (Symphony AM).
The transaction had exited its original reinvestment period in April 2015, and approximately $11.3 million of the class A notes had been paid down, with $365,917,605 of the original balance remaining, as of the refinancing date. The class A-R notes were issued in the amount of $366 million, while the class B-R, C-R, D-R and E-R were issued in the same amounts as the previously outstanding class B, C, D and E notes. The refinancing notes have the same terms as the previously outstanding classes, except that the spreads have changed. Spreads over LIBOR on the class A-R and E-R notes increased to 1.45% and 7.18%, respectively, while spreads on the class B-R, C-R and D-R notes decreased to 1.85%, 2.45% and 2.96%, respectively.
In addition, the transaction was amended to reset the reinvestment period to four years (ending October 2020), non-call period to two years (ending October 2020), stated maturity to 12 years (October 2028) and the weighted average life (WAL) test to eight years. The amendment also added provisions to address compliance with the Volcker Rule, prohibiting bonds, senior secured notes and other non-loan assets, including letters of credit, from the portfolio. An interest diversion test of 104.67%, which is calculated in the same manner as the class E overcollateralization (OC) test, was also inserted into the interest payment waterfall, after the payment of the subordinated collateral management fees. The interest diversion test will divert the lesser of 50% of the available interest proceeds and the amount necessary to bring the test back into compliance during the reinvestment period. The investment criteria after the reinvestment period was also changed to permit the reinvestment of prepayment proceeds through October 16, 2026, and on each day thereafter, as long as the class A-R notes are paid in full. Language regarding S&P-related terms and collateral quality tests were also adjusted, such as its recovery rates and industry classifications, among other items.
KEY RATING DRIVERS
Sufficient Credit Enhancement: Credit enhancement (CE) of 38.0% for the class A-R notes, in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in the 'AAAsf' stress scenario. The degree of CE available to class A-R notes is above the average CE levels typically seen on like-rated tranches of recent CLO issuances backed by broadly syndicated loans.
'B' Asset Quality: The average credit quality of the FSP is '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, class A-R notes are unlikely to be affected by the foreseeable level of defaults. The class A-R notes are projected to be able to withstand default rates of up to 60.8%.
Strong Recovery Expectations: The indicative portfolio consists of 97.0% first lien senior secured loans. Approximately 87.6% of the indicative portfolio has either strong recovery prospects or a Fitch-assigned recovery rating of 'RR2' or higher, resulting in a base case recovery assumption of 75.1%. In determining the class A-R note rating, Fitch stressed the indicative portfolio by assuming a higher portfolio concentration of assets with lower recovery prospects and further reduced recovery assumptions of higher rating stress assumptions, resulting in a 39.3% recovery rate assumption in Fitch's 'AAAsf' scenario.
Fitch's analysis focused on the Fitch stressed portfolio (FSP), given the reset terms of the transaction and the manager's continued ability to reinvest principal proceeds during the reinvestment period. As a result, cash flow model analysis was conducted for the refinancing.
The FSP consisted of approximately $590 million of loans and included the following assumptions:
--90% of which represented senior secured loans and 10% second-lien loans;
--Maximum concentrations for the five largest obligors;
--Maximum concentrations for the three largest industries;
--95% floating-rate assets earning WAS of 3.55% over LIBOR (per the targeted WAS trigger indicated by the arranger) and 5% fixed assets earning a weighted average coupon (WAC) of 7.50%;
--10% of the underlying assets pay interest semi-annually,
The transaction allows for a 7.5% concentration limitation of 'CCC' rated collateral (as defined by S&P). However, the concentrations are based on assets that both currently have and had at the time of purchase a 'CCC' rating. Typically, these concentration limitations are based solely on the current ratings of the assets. Theoretically, this allows for the manager to purchase additional assets rated 'CCC' even if the current portfolio consists of 7.5% 'CCC' rated assets that, at the time of purchase, were rated higher than the 'CCC' category. To account for the additional flexibility afforded to the manager, Fitch ran the FSP with a 10% 'CCC' bucket.
For additional details on the transaction, including its other concentration limitations, please refer to the New Issue Report published on June 5, 2012.
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 the 'AAAsf' rating stress were 57.3% and 39.3%, respectively.
Fitch's cash flow modeling considered 9 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-R notes passed the 'AAAsf' PCM hurdle rate of 57.3% in all 9 stress scenarios, with a minimum cushion of 3.5%. Fitch was comfortable assigning 'AAAsf' to the class A-R notes because the agency believes 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-R notes reflects the expectation that each class has sufficient levels of credit protection to withstand potential deterioration in the credit quality of the portfolio.
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 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-R notes to remain investment grade even under the most extreme sensitivity scenarios. Results under these sensitivity scenarios ranged between 'AAAsf' and 'A+sf' for the class A-R notes. The results of the sensitivity analysis further contributed to Fitch's assignment of Stable Outlooks to the class A-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 is available by accessing the appendix referenced under "Related Research" below. 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. However, the offering document of this transaction refinancing included a draft of the supplemental indenture as a supplemental exhibit, which contains RW&Es related to the underlying asset pool of the CLO. 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:
California Street CLO IX Limited Partnership/LLC
--$366,000,000 class A-R notes 'AAAsf'; Outlook Stable.
Fitch does not rate the class B-R, C-R, D-R, E-R and LP certificates.
Additionally, the following classes are 'Paid-in-Full' (PIF):
--$365,917,605 class A notes 'PIF'.
Additional information is available at www.fitchratings.com.
Sources of Information:
The information used to assess these ratings was sourced from periodic trustee reports, the public domain and the arranger, Morgan Stanley & Co.
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01 Sep 2016)
Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 17 May 2016)
Global Rating Criteria for CLOs and Corporate CDOs (pub. 09 Sep 2016)
Global Structured Finance Rating Criteria (pub. 27 Jun 2016)
California Street CLO IX Limited Partnership (US Structured Credit)
Dodd-Frank Rating Information Disclosure Form
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