NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed five classes of notes issued by Ares XXXI CLO Ltd. (Ares XXXI). A complete list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The affirmations are based on the stable performance of the underlying portfolio, the sufficient credit enhancement available to the notes, and the cushions available in the CLO's cash flow modeling results. As of the June 2015 trustee report, the transaction continues to pass all coverage tests and collateral quality tests, and there have been no defaults in the underlying portfolio to date. Fitch's cash flow analysis also indicates each class of notes is passing all 12 interest rate and default timing scenarios at or above their current rating levels.
The loan portfolio par amount plus principal cash is approximately $1.25 billion. The current weighted average spread (WAS) is 4% versus a minimum WAS trigger of 4.3%, as reported by the trustee. Additionally, the weighted average rating factor remains unchanged at 'B' since the closing date. Fitch currently considers 3.3% of the collateral (excluding cash) to be rated in the 'CCC' category versus 2.3% in the indicative portfolio at closing, based on Fitch's Issuer Default Rating (IDR) Equivalency Map. The loan portfolio (excluding cash) is invested in 96.7% senior secured loans and 3.3% second lien loans, and approximately 84.6% of the portfolio has strong recovery prospects or a Fitch-assigned Recovery Rating of 'RR2' or higher.
The Stable Outlook on each class of notes of Ares XXXI reflects the expectation that the notes have sufficient levels of credit protection to withstand potential deterioration in the credit quality of the portfolio.
The ratings of the notes may be sensitive to the following: asset defaults, negative portfolio migration, lower than historically observed recoveries for defaulted assets, and breaches of concentration limitations or portfolio quality covenants. Fitch conducted rating sensitivity analysis on the closing date of Ares XXXI, incorporating increased levels of defaults and reduced levels of recovery rates, among other sensitivities.
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.
Initial Key Rating Drivers and Rating Sensitivity are further described in the Rating Action Commentary (RAC) published on Aug. 28, 2014.
Ares XXXI is an arbitrage cash flow collateralized loan obligation (CLO) that closed on Aug. 28, 2014 and is managed by Ares CLO Management XXXI, LP (Ares), a wholly owned subsidiary of Ares Management LLC.
DUE DILIGENCE USAGE
No third party due diligence was reviewed in relation to this rating action.
Fitch has affirmed the following ratings:
--$759,900,000 class A-1 notes at 'AAAsf'; Outlook Stable;
--$136,900,000 class A-2 notes at 'AAsf'; Outlook Stable;
--$75,700,000 class B notes at 'Asf'; Outlook Stable;
--$46,250,000 class C notes at 'BBBsf'; Outlook Stable;
--$57,500,000 class D notes at 'BBsf'; Outlook Stable.
Fitch does not rate the subordinated 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, Ares and the public domain.
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)
Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 19 Dec 2014)
Global Rating Criteria for CLOs and Corporate CDOs (pub. 30 Jul 2015)
Global Structured Finance Rating Criteria (pub. 06 Jul 2015)
Dodd-Frank Rating Information Disclosure Form