NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded one and affirmed five classes of notes issued by Newstar Commercial Loan Trust 2007-1 (NewStar 2007-1). Fitch has also revised the Outlook on one class of notes to Positive. A complete list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The upgrade and the revised Outlook are the result of increased credit enhancement due to the significant amortization of the capital structure, driven by loan prepayments in the portfolio. Since the last rating action in August 2014, approximately 52% of class A-1 and A-2 notes (collectively, the class A notes) have been paid.
As of the June 2015 trustee report, the credit quality of the portfolio has deteriorated to 'B/B-' from 'B+/B' since the last review. The portfolio has no charged-off loans and Fitch currently considers 13.2% of total commitments in the 'CCC' category as compared to 10.6% in the last review, based on Fitch's Issuer Default rating (IDR) Equivalency Map. Approximately 64.4% of the portfolio has strong recovery prospects or a Fitch assigned Recovery Rating of 'RR2' or higher. There are currently 61 obligors in the portfolio.
This review was conducted under the framework described in the report 'Global Rating Criteria for CLOs and Corporate CDOs' using the Portfolio Credit Model (PCM) for projecting 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 default timing and interest rate stress scenarios. The cash flow model was customized to reflect the CLO's structural features.
In order to address the increasing concentration risks of the amortizing portfolio, Fitch analysed the current portfolio assuming a combined stress of increased default probabilities, lower recovery assumptions and higher correlation by applying a default multiplier of 125% to the default probability of each obligor, 0.75x multiplier on loan-level recovery rates and 2x base correlation for the country, respectively, in PCM. Fitch also assumed a weighted average spread (WAS) of 3.80% on the portfolio. As a result, the class A and B notes performed at or above their current rating categories under the default timing and interest rate stresses in the cash flow model. Fitch's modelling results for the class C, D and E notes indicated higher passing ratings when the current portfolio's characteristics were analyzed, but the notes' performance under the combined stress scenario indicated that upgrades were not warranted at this time.
The notes for NewStar 2007-1 benefited from the application of excess spread via the additional principal amount (APA). For every dollar that is charged off of the performing portfolio, the APA feature directs recoveries from charged-off loans and excess interest proceeds otherwise available to the certificate holders to pay down the senior-most notes in an amount equal to the charged-off amount. The CLO paid $21.7 million as a result of the APA feature since May 2009. The APA was completely paid off on the February 2010 payment date, and as a result, the certificate holders have been receiving excess interest proceeds since the August 2010 payment date. In the absence of additional charged off loans, Fitch expects the certificate holders to continue receiving excess interest proceeds.
The Stable Outlooks reflect the notes' robust cushions available to withstand future potential deterioration in the underlying portfolio. The Positive Outlook for the class C notes reflects Fitch's expectations of improved performance of the notes in the near term.
The ratings for the notes may be sensitive to the following: asset defaults, negative portfolio migration, lower than historically observed recoveries for defaulted assets, or breach of concentration limitations or portfolio quality covenants. Fitch expects increasing concentration risks and breaches of portfolio covenants as the transaction continues out of reinvestment, but increased levels of credit enhancement should also mitigate these risks as the portfolio amortizes.
NewStar 2007-1 is a collateralized debt obligation (CDO) that closed on June 5, 2007 and is managed by NewStar Financial, Inc. (NewStar). The transaction's reinvestment period ended in May 2013, and its final legal maturity date is in September 2022. NewStar 2007-1 is secured by a portfolio composed of 97.0% corporate loans, primarily to middle-market issuers, and 3.0% CLO bonds, based on the total commitment amounts. Fitch's leveraged finance group provided model-based credit opinions for a majority of the loans in the portfolio, based on financial statements provided to Fitch by NewStar.
DUE DILIGENCE USAGE
No third party due diligence was reviewed in relation to this rating action.
Fitch has upgraded the following ratings:
--$24,000,000 class B notes to 'AAAsf' from 'AAsf'; Outlook Stable;
Fitch has affirmed and revised the Rating Outlook for the following ratings as indicated:
--$97,911,256 class A-1 notes 'AAAsf'; Outlook Stable;
--$30,800,455 class A-2 notes 'AAAsf'; Outlook Stable;
--$58,500,000 class C notes 'Asf'; Outlook to Positive from Stable;
--$27,000,000 class D notes 'BBB+sf'; Outlook Stable;
--$29,100,000 class E notes 'BBsf'; Outlook Stable.
Fitch does not rate the class F notes.
Additional information is available at www.fitchratings.com.
Sources of Information:
The sources of information used to assess these ratings were periodic trustee reports, NewStar 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