NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded three and affirmed three classes of notes issued by ACAS CLO 2007-1 Ltd./Corp. (ACAS CLO 2007-1). Fitch has also revised the Rating Outlook on one class of the notes to Stable from Positive. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The upgrades are the result of increased credit enhancement due to the significant amortization of the capital structure and the cushions available in Fitch's cash flow modelling results. Approximately 82.7%% and 13.6% of class A-1 and class A-1-J notes, respectively, have been paid. Class A-1-S notes were paid in full on April 20, 2016.
According to the May 2016 trustee report, the loan portfolio par amount plus principal cash is approximately $157 million. The credit quality of the portfolio has deteriorated to 'B+/B' from 'BB-/B+' since the last review in June 2015, based on Fitch's Issuer Default Rating (IDR) Equivalency Map. Fitch currently considers 11.8% of the collateral assets to be rated in the 'CCC' category as compared to 0.4% in the last review. Approximately 92.9% of the portfolio has strong recovery prospects or a Fitch assigned Recovery Rating of 'RR2' or higher. The transaction continues to pass all of its coverage tests with ample cushion and most of its concentration limitation and collateral quality tests. The current WAS is reported to be 2.8% from 2.7% at last review, versus a trigger of 2.8%. There are currently 51 obligors, compared to 82 obligors at last review, and there is one reported defaulted loan comprising 0.9% of 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.
The Stable Outlooks reflect the notes' robust cushions available to withstand future potential deterioration in the underlying portfolio. The Positive Outlooks for the class B notes reflect Fitch's expectations of improved performance of the notes in the near term.
The ratings of the notes may be sensitive to asset defaults, significant negative credit migration and lower than historically observed recoveries for defaulted assets. 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.
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 downgrading all assets by one notch and applying a default multiplier of 125% to the default probability of each obligor, 75% multiplier (i.e. 25% haircut) on loan-level recovery rates and 2x base correlation for the country, respectively, in PCM. Fitch also assumed a weighted average spread (WAS) of 2.80% on the portfolio. All classes of notes are able to perform at or above their current ratings under the default timing and interest rate stresses in the cash flow model. Fitch's modelling results for the class B, C and D notes indicated higher passing ratings when the current portfolio and combined stressed scenario were analysed, warranting the upgrades.
ACAS CLO 2007-1 is a cash flow collateralized loan obligation (CLO) that closed April 26, 2007 and is managed by American Capital CLO Management, LLC. The transaction exited its reinvestment period in April 2014, but the manager is still permitted to reinvest proceeds from prepaid assets, credit- improved and credit-risk sales after the reinvestment period, subject to certain conditions. However, no purchases were reported since the last review. On May 23, 2016, Ares Management LP agreed to acquire American Capital Ltd. Fitch deems both CLO managers' as acceptable based on the operational risk assessment.
DUE DILIGENCE USAGE
No third-party due diligence was reviewed in relation to this rating action.
Fitch has upgraded and revised Rating Outlooks on the following as indicated:
--$22,000,000 class B notes to 'AAsf' from 'Asf'; Outlook Positive;
--$21,000,000 class C notes to 'Asf' from 'BBBsf'; Outlook Stable
--$15,500,000 class D notes to 'BBsf' from 'Bsf'; Outlook to Stable from Positive.
Fitch has affirmed the following:
--$19,127,797 class A-1 at 'AAAsf'; Outlook Stable;
--$29,145,063 class A-1-J at 'AAAsf'; Outlook Stable;
--$25,000,000 class A-2 at 'AAAsf'; 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 trustee reports, note valuation reports, 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. 17 May 2016)
Criteria for Rating Caps and Limitations in Global Structured Finance Transactions (pub. 28 May 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