NEW YORK--(BUSINESS WIRE)--Fitch Ratings expects to assign the following rating and Rating Outlook to THL Credit Wind River 2016-1 CLO Ltd./LLC:
--$384,000,000 class A notes 'AAAsf', Outlook Stable.
Fitch does not expect to rate the class B, C, D or E notes or the subordinated notes.
THL Credit Wind River 2016-1 CLO Ltd. (issuer) and THL Credit Wind River 2016-1 CLO LLC (co-issuer) together comprise an arbitrage cash flow collateralized loan obligation (CLO) managed by THL Credit Senior Loan Strategies LLC (THL Credit). Net proceeds from the issuance of the secured and subordinated notes will be used to purchase a portfolio of approximately $600 million of primarily senior secured leveraged loans. The CLO will have an approximately four-year reinvestment period and two-year noncall period.
KEY RATING DRIVERS
Sufficient Credit Enhancement: Credit enhancement (CE) of 36% for the class A notes, in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in the 'AAAsf' stress scenario. The degree of CE available to the class A notes is below the average CE of recent CLO issuances; however, cash flow modeling indicates performance in line with other Fitch-rated 'AAAsf' CLO notes.
'B+/B' Asset Quality: The average credit quality of the indicative portfolio is 'B+/B', which is comparable to recent CLOs. Issuers rated in the 'B' rating category denote a highly speculative credit quality; however, in Fitch's 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 58.6%.
Strong Recovery Expectations: The indicative portfolio consists of 98% first lien senior secured loans. Approximately 96.5% 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 79.7%. In determining the class A 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 stresses, resulting in a 36.7% 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 A 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 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, U.S. Bank N.A., 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, expects 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'. U.S. Bank's long-term and short-term ratings currently meet this expectation. Therefore, the rating for the class A notes remains achievable 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 (RBC Capital Markets, LLC) and the public domain.
THL Credit Wind River 2016-1 CLO Ltd./LLC
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14
Criteria for Interest Rate Stresses in Structured Finance Transactions
and Covered Bonds (pub. 17 May 2016)
Exposure Draft: Counterparty Criteria for Structured Finance and Covered
Bonds (pub. 14 Apr 2016)
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