Fitch Upgrades Two Classes and Affirms Four Classes of Mercer Field CLO LP; Outlooks Revised

CHICAGO--()--Fitch Ratings has upgraded the class B and exchangeable combination notes (the combination notes) and affirmed the class A, C, D and E notes issued by Mercer Field CLO LP (Mercer Field CLO). Fitch has also revised the Outlooks on the Class C, D and E notes to Positive from Stable. A complete list of rating actions follows at the end of the release.

KEY RATING DRIVERS

The rating actions are based on the stable performance of the underlying portfolio, the credit enhancement available to the notes, and the cushions available in the collateralized loan obligation's (CLO) cash flow modelling results. Fitch's cash flow analysis also indicates each class of notes is passing all nine interest rate and default timing scenarios at or above their current rating levels.

The total loan portfolio par amount plus $149.3 million principal cash is approximately $1.07 billion, as of the October 2016 trustee report. There is one defaulted loan comprising 0.3% of the portfolio, and the transaction continues to pass all coverage tests and collateral quality tests. The weighted average spread (WAS) of the portfolio has tightened to 4.2% from 4.5% in the last review in November 2015, relative to a minimum WAS trigger of 4.0%. The portfolio, excluding cash, is invested in 98.1% senior secured loans and 1.9% senior secured bonds, and approximately 86.6% of the portfolio has strong recovery prospects or a Fitch-assigned recovery rating of 'RR2' or higher. The performing portfolio remains in the 'B/B-' range, according to Fitch's Issuer Default Rating (IDR) Equivalency Map.

The class B notes are able to pass the 'AAAsf' rating stress with significant cushion in Fitch's cash flow analysis, while the performance of the combination notes reflects an improved credit profile given the amortization of the notes since inception. The combination notes consist of underlying components from the class C, D, E and the unrated income notes (collectively, the underlying Mercer Field CLO components) and a Fannie Mae (FNMA) principal-only strip scheduled to mature in May 2030. To date, the combination notes have received approximately $92 million (28% of the original balance) in proceeds from the underlying Mercer Field CLO components. As a result, the combination notes are able to pass at its current rating level, without the credit support of the FNMA strip.

The Stable Outlooks reflect the notes' robust cushions available to withstand future potential deterioration in the underlying portfolio. The Positive Outlooks for the class C, D, E and combination notes reflect Fitch's expectations of improved performance of the notes in the near term.

RATING SENSITIVITIES

The ratings of the notes may be sensitive to the following: asset defaults, portfolio migration, including assets being downgraded to 'CCC', portions of the portfolio being placed on Rating Watch Negative, overcollateralization or interest coverage test breaches, or breach of concentration limitations or portfolio quality covenants. Fitch conducted rating sensitivity analysis on the closing date of Mercer Field CLO LP, incorporating increased levels of defaults and reduced levels of recovery rates, among other sensitivities.

Initial Key Rating Drivers and Rating Sensitivity are further described in the New Issue Report published on January 18, 2013.

Mercer Filed CLO is an arbitrage cash flow CLO that is managed by Guggenheim Partners Investment Management, LLC (GPIM), with a four-year reinvestment period ending in December 2016 and an 18 month noncall period, which ended in June 2014. The manager has the ability to reinvest unscheduled principal proceeds and sales proceeds from the disposal of credit risk or credit improved obligations after the reinvestment period, subject to certain conditions.

This review was conducted under the framework described in the report 'Global Rating Criteria for CLOs and Corporate CDOs' using Fitch's Portfolio Credit Model (PCM) to project 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 DILIGENCE USAGE

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

REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS

A comparison of the transaction's Representations, Warranties, and Enforcement Mechanisms (RW&Es) to those of typical RW&Es for that asset class is also available by accessing the reports and links indicated below.

Fitch has upgraded the following ratings:

--$154,350,000 class B notes to 'AAAsf' from 'AAsf'; Outlook Stable;

--$240,168,278 exchangeable combination notes to 'BBB+sf' from 'BBB-sf'; Outlook maintained at Positive.

Fitch has affirmed the following ratings:

--$556,500,000 class A notes 'AAAsf'; Outlook Stable;

--$78,750,000 class C notes 'Asf'; Outlook revised to Positive from Stable;

--$65,100,000 class D notes 'BBBsf'; Outlook revised to Positive from Stable;

--$60,480,000 class E notes 'BBsf'; Outlook revised to Positive from Stable.

Fitch does not rate the income 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. 01 Sep 2016)

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

Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 26 Oct 2016)

https://www.fitchratings.com/site/re/888492

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

Related Research

Mercer Field CLO LP -- Appendix

https://www.fitchratings.com/site/re/698491

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014834

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014834

Endorsement Policy

https://www.fitchratings.com/regulatory

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Fitch Ratings, Inc.
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or
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or
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Contacts

Fitch Ratings
Surveillance Analyst
Nazneen Kutty
Associate Director
+1-312-368-3217
Fitch Ratings, Inc.
70 W Madison Street
Chicago, IL 60602
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