CHICAGO--(BUSINESS WIRE)--Fitch Ratings expects to assign the following rating and Rating Outlook to MCF CLO IV LLC:
--$228,500,000 class A notes 'AAAsf'; Outlook Stable.
Fitch does not expect to rate the class B, C, D or E notes, or the equity interests.
MCF CLO IV LLC (the issuer) is a middle-market (MM) collateralized loan obligation (CLO) that will be managed by MCF Capital Management LLC (MCF). Net proceeds from the issuance of the secured notes and equity interests will be used to purchase a portfolio of approximately $400 million of senior secured MM corporate loans. The CLO will have a four-year reinvestment period and a two-year noncall period.
KEY RATING DRIVERS
Sufficient Credit Enhancement: Credit enhancement (CE) of 42.9% 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. CE is significantly higher than the levels typically seen on broadly syndicated CLOs.
'B/B-' Asset Quality: Fitch expects the credit quality of the underlying obligors to primarily fall in the 'B/B-' range. Fitch analyzed a portfolio with a weighted average rating factor (WARF) of 44, which represents a portfolio in which the permitted 'CCC' bucket is maximized with nearly all other assets having 'B-' ratings - a scenario Fitch views as unlikely. The analysis on such portfolio indicated the class A notes demonstrating cash flow performance in line with other 'AAAsf' CLO notes. Class A notes are projected to be able to withstand default rates of up to 78.3%.
Strong Recovery Expectations: The transaction only permits investment in first lien senior secured loans. Approximately 83% 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 77.1%. In determining the class A note rating, Fitch reduced the weighted average recovery rating (WARR) of the portfolio to reach the minimum trigger as represented by the arranger, and further reduced recovery assumptions for higher rating stress scenarios. The analysis of MCF CLO IV class A notes assumed a 38.1% 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 Oct. 15, 2014. Sources of information used to assess these ratings were provided by the arranger, Wells Fargo Securities, LLC, MCF, 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: MCF CLO IV LLC
Global Rating Criteria for Corporate CDOs
Global Structured Finance Rating Criteria
Counterparty Criteria for Structured Finance and Covered Bonds
Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds