CHICAGO--(BUSINESS WIRE)--Fitch Ratings expects to assign the following rating and Rating Outlook to LCM XVII Limited Partnership/LLC:
--$255,000,000 class A notes 'AAAsf'; Outlook Stable.
Fitch does not expect to rate the class B-1, B-2, C, D or E notes, or the LP certificates.
LCM XVII Limited Partnership (the issuer) and LCM XVII LLC (the co-issuer) together comprise an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by LCM Asset Management LLC. Net proceeds from the issuance of the secured notes and limited partnership (LP) certificates will be used to purchase a portfolio of approximately $400 million of primarily senior secured leveraged loans.
KEY RATING DRIVERS
Sufficient Credit Enhancement: Credit enhancement (CE) of 36.3% for class A notes, in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in a 'AAAsf' stress scenario. The degree of CE available to class A notes is slightly lower than the average CE of recent CLO issuances; however, cash flow modeling indicates performance in line with other 'AAAsf' CLO notes.
'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, class A notes are unlikely to be affected by the foreseeable level of defaults. Class A notes are projected to be able to withstand default rates of up to 61.7%.
Strong Recovery Expectations: The indicative portfolio consists of 95% first lien senior secured loans. Approximately 89.2% 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 74.5%. In determining the class A note rating, 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 stress scenarios. The analysis of LCM XVII class A notes assumed a 35.9% recovery rate in Fitch's 'AAAsf' scenario.
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 notes to remain investment grade, even under the most extreme sensitivity scenarios. Results under these sensitivity scenarios ranged between 'A+sf' and 'AAAsf' for the class A notes.
The expected ratings are based on information provided to Fitch as of Sept. 11, 2014. Sources of information used to assess these ratings were provided by the arranger, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and the public domain.
Key Rating Drivers and Rating Sensitivities are further detailed in the accompanying presale report, available at 'www.fitchratings.com' or by clicking on the link.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Global Structured Finance Rating Criteria' (Aug. 4, 2014);
--'Global Rating Criteria for Corporate CDOs' (July 25, 2014);
--'Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds' (Jan. 23, 2014);
--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 14, 2014).
Applicable Criteria and Related Research: LCM XVII Limited Partnership/LLC (US STRUCTURED CREDIT)
Global Structured Finance Rating Criteria
Global Rating Criteria for Corporate CDOs
Criteria for Interest Rate Stresses in Structured Finance Transactions
Counterparty Criteria for Structured Finance and Covered Bonds