Fitch Rates LCM XXI Limited Partnership/LLC

CHICAGO--()--Fitch Ratings has assigned the following rating to LCM XXI Limited Partnership/LLC:

--$235,000,000 class A notes 'AAAsf'; Outlook Stable.

Fitch does not rate the class B-1, B-2, C, D or E notes or the LP Certificates.

TRANSACTION SUMMARY

LCM XXI Limited Partnership (the issuer) and LCM XXI LLC (the co-issuer) comprise an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by LCM Asset Management LLC. Net proceeds from the issuance of the secured notes and limited partnership (LP) certificates will be used to purchase a portfolio of approximately $377.8 million of primarily senior-secured leveraged loans. The CLO will have a 4.5-year reinvestment period, a two-year noncall period for the class A, B-1, B-2, and E notes and a 2.5-year noncall period for class C and D notes.

KEY RATING DRIVERS

Sufficient Credit Enhancement: Credit enhancement (CE) of 37.8% for class A notes, in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in an 'AAAsf' stress scenario. The degree of CE available to class A notes is in line with the average CE of recent CLO issuances, and cash flow modeling indicates performance in line with other 'AAAsf' CLO notes.

'B+/B' Asset Quality: The average credit quality of the indicative portfolio is 'B+/B', which is comparable with recent CLOs. Issuers rated in the 'B' rating category denote a highly speculative credit quality; however, in Fitch Ratings' opinion, class A notes are unlikely to be affected by the foreseeable level of defaults. Class A notes are projected to be able to withstand default rates of up to 66.5%.

Strong Recovery Expectations: The indicative portfolio consists of 100% first-lien senior secured loans. Approximately 93.5% 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 81.9%. In determining the class A note 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 scenarios, resulting in a 40.2% recovery rate in Fitch's 'AAAsf' scenario.

RATING SENSITIVITIES

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 'AA-sf' and 'AAAsf' for the class A notes.

Fitch published an exposure draft of its Counterparty Criteria for Structured Finance and Covered Bonds on April 14, 2016. The exposure draft serves as the operative criteria report for this ratings analysis. Under the exposure draft, a direct support counterparty is expected to maintain a long-term rating of at least 'A' or a short-term rating of at least 'F1' in order to support note ratings of up to 'AAAsf'. The issuer's account holder, Deutsche Bank Trust Company Americas (DBTCA, rated 'A-/F1'/Stable), satisfies the minimum expected ratings threshold for a direct support counterparty under the exposure draft framework.

Fitch's existing counterparty criteria (dated May 14, 2014), as well as the issuer's governing documents, expect this role to be fulfilled by an institution with a long-term rating of at least 'A' and a short-term rating of at least 'F1'. DBTCA's long-term rating does not meet this expectation. As a mitigant the transaction documents require that, so long as DBTCA does not maintain these ratings, any cash deposited with DBTCA shall be swept daily to an institution that does maintain such ratings. Therefore cash should only be exposed to intraday exposure to DBTCA. Fitch gains comfort with these provisions and notes that DBTCA's short-term rating of 'F1' is in line with the expectation for short-term ratings under Fitch's existing counterparty criteria, and that the role of issuer account holder poses inherently short-term risk to the CLO. Therefore a 'AAAsf' rating is achievable for the class A notes under Fitch's existing criteria.

The framework regarding expectations for qualified investments has not materially changed between the existing criteria and the exposure draft.

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 (Deutsche Bank Securities Inc.) and the public domain.

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158

Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 19 Dec 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=838868

Exposure Draft: Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878412

Global Rating Criteria for CLOs and Corporate CDOs (pub. 12 Nov 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873664

Global Structured Finance Rating Criteria (pub. 06 Jul 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867952

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1003063

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003063

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings, Inc.
Primary Analyst
Robert Rhein
Senior Director
+1-312-606-2314
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
John Um, CFA
Director
+1 212-908-0287
or
Committee Chairperson
Alina Pak, CFA
Senior Director
+1 312-368-3184
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Robert Rhein
Senior Director
+1-312-606-2314
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
John Um, CFA
Director
+1 212-908-0287
or
Committee Chairperson
Alina Pak, CFA
Senior Director
+1 312-368-3184
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com