CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned the following ratings to Sound Point CLO X, Ltd./Inc.:
--$2,000,000 Class X Notes 'AAAsf'; Outlook Stable;
--$250,000,000 Class A-1 Notes 'AAAsf'; Outlook Stable;
--$42,500,000 Class A-2 Notes 'AAAsf'; Outlook Stable.
Fitch does not rate the class B, C, D or E notes or the subordinated notes.
Sound Point CLO X, Ltd. (the issuer) and Sound Point CLO X, Corp. (the co-issuer) together comprise an arbitrage cash flow collateralized loan obligation (CLO) managed by Sound Point Capital Management, LP (Sound Point). Net proceeds from the issuance of the secured and subordinated notes will be used to purchase a portfolio of $450 million of primarily senior secured leveraged loans. The CLO will have an approximately four-year reinvestment period and a two-year noncall period.
KEY RATING DRIVERS
Sufficient Credit Enhancement: Credit enhancement (CE) of 35.0% for class A-1 and A-2 notes (collectively, 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 below the average CE of recent 'AAAsf' CLO notes; however, cash flow modeling indicates performance in line with other Fitch-rated 'AAAsf' CLO notes. Class X notes are expected to be paid in full from the application of interest proceeds via the interest waterfall by the second payment date.
'B+/B' Asset Quality: The average credit quality of the indicative portfolio, after making adjustments as described in this report is 'B+/B', which is in line with that of recent CLOs. Issuers rated in the 'B' rating category denote a highly speculative credit quality; however, class X and A notes are unlikely to be affected by the foreseeable level of defaults. Class X and A notes are projected to be able to withstand default rates of up to 100% and 63.4%, respectively.
Strong Recovery Expectations: The indicative portfolio consists of 98.0% first lien senior secured loans. Approximately 94.8% of the indicative portfolio has strong recovery prospects or a Fitch-assigned recovery rating of 'RR2' or higher and the base case recovery assumption is 77.8%. In determining the class A notes' ratings 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 stresses, resulting in a 37.1% 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 X, A-1, and A-2 notes to remain investment grade even under the most extreme sensitivity scenarios. Results under these sensitivity scenarios were consistently 'AAAsf' for the class X notes and ranged between 'AA-sf' and 'AAAsf' for the class A-1 and A-2 notes.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
The publication of a representations, warranties and enforcement mechanisms appendix is not required for this transaction.
Additional information is available at www.fitchratings.com.
Sources of Information:
The information used to assess these ratings was provided by the arranger (Morgan Stanley & Co. LLC ) and the public domain.
Sound Point CLO X, Ltd./Inc.
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. 12 Nov 2015)
Global Structured Finance Rating Criteria (pub. 06 Jul 2015)
Dodd-Frank Rating Information Disclosure Form