NEW YORK--(BUSINESS WIRE)--Fitch ratings has assigned a 'AAAsf' rating to the class A-1R notes issued by Apidos CLO XVII/ LLC (Apidos XVII). The Rating Outlook is Stable.
Apidos XVII issued class A-1R, A-2R, and B-R (collectively, the refinancing notes) and applied the net issuance proceeds to redeem the class A-1A, A-1B, A-2A, A-2B, and B notes at par plus accrued interest on the refinancing date of Dec. 1, 2016. Fitch originally rated only the class X, A-1A and A-1B notes.
The refinancing notes generally have the same terms as the previously outstanding classes, except that the stated coupons have changed. Proceeds from the class A-1R notes (which will pay a floating coupon) were used to redeem the class A-1A and A-1B notes, which paid floating and fixed coupons, respectively. Additionally the proceeds from the class A-2R notes (which will pay a floating coupon) were used to redeem the class A-2A and A-2B notes, which paid floating and fixed coupons, respectively. The proceeds from the class B-R floating rate notes were used to redeem the class B floating rate notes. The new refinanced notes reduced the weighted average cost of funding to 1.86% from 2.20% that was at closing date. The class C, D, or E notes were not refinanced.
KEY RATING DRIVERS
Sufficient Credit Enhancement: Credit enhancement (CE) of 36.9% for the class A-1R 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-R notes is in line with 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 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, class A-1R notes are unlikely to be affected by the foreseeable level of defaults. The class A-1R notes are projected to be able to withstand default rates of up to 59.2%.
Strong Recovery Expectations: The current portfolio consists of 98.5% first lien senior secured loans. Approximately 90.0% 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 80.0%. In determining the class A-1R notes' rating, Fitch stressed the portfolio by assuming a higher concentration of assets with lower recovery prospects and further reduced recovery assumptions for higher rating stresses, resulting in a 31.2% recovery rate in Fitch's 'AAAsf' scenario.
Fitch gave no credit for the approximately $1.4 million of defaulted assets in the portfolio. All collateral quality tests, concentration limitations, and coverage tests are in compliance. The current weighted average spread (WAS) is 3.8% versus a minimum WAS trigger of 3.70%. The current WAL is 4.6 years, and the weighted average Fitch rating of the portfolio is 'B+/B'. Fitch currently considers 6.5% 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 1.5% of the current portfolio, as compared to a permitted 7.5% limitation.
Fitch's analysis focused on the Fitch stressed portfolio (FSP) and cash flow model analysis was conducted for the refinancing, since the payment type of some of the liabilities switched from fixed--to floating-rate.
The FSP consisted of approximately $497 million of loans and principal proceeds and included the following assumptions:
--90.0% senior secured loans and 10.0 second-lien loans;
--Maximum concentrations for the five largest obligors;
--Maximum concentrations for the three largest industries;
--7.5% 'CCC' rated collateral obligations;
--92.5% floating-rate assets earning a WAS of 3.70% over LIBOR, per the WAS covenant, and 7.5% fixed-rate assets earning a weighted average coupon (WAC) of 7.00%, per the WAC covenant;
--7.5% 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 Nov. 24, 2014, available at 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 50.8% and 38.6%, 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 analyses of the current portfolio and the FSP, the class A-1R notes passed the 'AAAsf' PCM hurdle rate in all nine stress scenarios with minimum cushions of 18.1% and 8.4%, respectively.
Fitch was comfortable assigning an 'AAAsf' rating to the class A-1R notes because it 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 and when analysing the current portfolio. The Stable Outlook on the class A-1R 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.
Fitch evaluated the class A-1R notes' 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-1R notes to remain investment grade even under the most extreme sensitivity scenarios. Results under these sensitivity scenarios ranged between 'AAAsf' and 'AAsf' for the class A-1R notes. The results of the sensitivity analysis further contributed to Fitch's assignment of a Stable Outlook to the class A-1R 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:
--$314,000,000 class A-1R notes 'AAAsf; Outlook Stable.
Fitch does not rate the class A-2R, B-R, C, D, E or the subordinated notes.
Additionally, the following classes are 'Paid-in-Full' (PIF):
--$2,500,000 class X notes 'PIF';
--$294,000,000 class A-1A notes 'PIF';
--$20,000,000 class A-1B notes 'PIF'.
Additional information is available at www.fitchratings.com.
Sources of Information:
The sources of information used to assess these ratings were the arranger (Merrill Lynch, Pierce, Fenner & Smith, Inc.) and the public domain.
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. 26 Oct 2016)
Global Rating Criteria for CLOs and Corporate CDOs (pub. 09 Sep 2016)
Global Structured Finance Rating Criteria (pub. 27 Jun 2016)
Dodd-Frank Rating Information Disclosure Form
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