CHICAGO--(BUSINESS WIRE)--Fitch Ratings expects to assign the following ratings to Cutwater 2014-II, Ltd./LLC (Cutwater 2014-II):
-- $258,100,000 class A-1 notes 'AAAsf'; Outlook Stable.
Fitch does not expect to rate the class A-2, B, C, D or the subordinated notes.
Cutwater 2014-II, Ltd. (the issuer) and Cutwater 2014-II, LLC (the co-issuer) represent an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by Cutwater Investor Services Corp. (CISC). Net proceeds from the issuance of notes will be used to purchase a portfolio of approximately $400 million of leveraged loans. The CLO will have a four-year reinvestment period.
KEY RATING DRIVERS
Sufficient Credit Enhancement: Credit enhancement (CE) of 35.5% for class A-1, in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in the 'AAAsf' stress scenario. The level of CE for the class A-1 notes is below the average for recent CLO issuances.
'B/B-' Asset Quality: The average credit quality of the indicative portfolio is 'B/B-', which is in line with that of recent CLOs. Issuers rated in the 'B' rating category denote relatively weak credit quality; however, in Fitch's opinion, the class A-1 notes are unlikely to be affected by the foreseeable level of defaults. The class A-1 notes are robust against default rates of up to 62.4%.
Strong Recovery Expectations: The indicative portfolio consists of 96.7% first-lien senior-secured loans, 94.5% of which have strong recovery prospects or a Fitch-assigned Recovery Rating of 'RR2' or higher, resulting in a base case recovery assumption of 77.6%. In determining the class A-1 notes' 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 assumptions. The analysis of Cutwater 2014-II class A-1 notes assumed a 35.9% recovery rate in Fitch's 'AAAsf' scenario.
In addition to Fitch's stated criteria, the agency analyzed the structure's sensitivity to the potential variability of key model assumptions including decreases in weighted average spread or recovery rates and increases in default rates or correlation. Fitch expects the class A-1 notes to remain investment grade even under the most extreme sensitivity scenarios. Results under these sensitivity scenarios ranged between 'Asf' and 'AAAsf' for the class A-1 notes.
The expected ratings are based on information provided to Fitch as of Dec. 12, 2014. Sources of information used to assess these ratings were provided by the arranger, Natixis Securities Americas, and the public domain. Key Rating Drivers and Rating Sensitivities are further described in the accompanying presale report.
The presale report is available to investors on Fitch's web site at www.fitchratings.com. For more information about Fitch's comprehensive subscription service FitchResearch, which includes all presale reports, surveillance and credit reports on more than 20 asset classes, contact product sales at +1-212-908-0800 or at 'email@example.com'.
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: Cutwater 2014-II, Ltd./LLC (US Structured Credit)
Counterparty Criteria for Structured Finance and Covered Bonds
Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds
Global Structured Finance Rating Criteria
Global Rating Criteria for Corporate CDOs