NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns the following ratings to Guggenheim Private Debt Fund Note Issuer 2.0, LLC (Guggenheim PDFNI 2):
--$76,000,000 Class A Notes, Series A-2, 'A-sf', Outlook Stable;
--$25,000,000 Class B Notes, Series B-2, 'BBB-sf', Outlook Stable;
--$21,000,000 Class C Notes, Series C-2, 'BBsf', Outlook Stable;
--$10,125,000 Class D Notes, Series D-2, 'Bsf', Outlook Stable.
Fitch does not rate the leverage tranche, class E notes and limited liability company membership interests.
In addition, the note issuance will not result in any rating action on the existing notes issued on April 12, 2016 (the first funding date). A full list of existing rated notes follows at the end of this release.
Fitch assigned ratings to the notes issued on the second funding date occurring on July 8, 2016. Pursuant to the second funding date, the issuer has drawn an aggregate of $190 million from the commitments plus $60 million from the leverage tranche (not rated by Fitch). Of the $190 million, $57.875 million was issued in the form of first-loss class E notes and LLC membership interests, both of which are also not rated by Fitch. The first funding date had occurred on April 12, 2016, on which $500 million of total capitalization was achieved. This amount consisted of $265 million of rated notes, $145 million of unrated first-loss class E notes and LLC interests, and $90 million from the leverage tranche All notes from each series are cross-collateralized by the entire collateral portfolio, which is expected to consist of approximately $186.8 million of broadly syndicated loans, $482.6 million of private debt investments (PDIs) and approximately $85.3 million of cash.
Guggenheim PDFNI 2.0 is a collateralized loan obligation (CLO) transaction that invests in a portfolio composed of a combination of broadly syndicated loans and middle market PDIs. The manager, Guggenheim Partners Investment Management, LLC (GPIM) has raised $2.0 billion of commitments from investors to fund the transaction. Investors earn class-specific commitment fees on the undrawn portions of their commitments. The commitments are expected to be fully drawn through a total of seven separate funding dates during the investment period. At each funding date, notes and the leverage tranche will be issued in proportions that may decrease the level of credit enhancement (CE) available for each class. CE levels at each funding date are further described in Fitch's report 'Guggenheim Private Debt Fund Note Issuer 2.0, LLC' dated Sept. 25, 2015.
Fitch expects to assess the creditworthiness of the notes at each funding date.
KEY RATING DRIVERS
Sufficient Credit Enhancement: CE for each class of rated notes, in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in each class's respective rating stress scenario. The degree of CE available to each class of rated notes exceeds the average CE levels typically seen on like-rated tranches of recent CLO issuances backed by middle market loans.
'B-/CCC+' Asset Quality: The average credit quality of the Fitch stressed portfolio is 'B-/CCC+', which is below that of recent CLOs. Issuers rated in the 'B' rating category denote a highly speculative credit quality while issuers in the 'CCC' rating category denote substantial credit risk. When analyzing the capital structure for the second funding date, class A, B, C and D notes are projected to be able to withstand default rates of up to 88.6%, 81.3%, 76.2% and 75.3%, respectively.
Strong Recovery Expectations: In determining the rating of the notes, 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 assumptions. The Fitch stressed portfolio assumed 100% of the assets were assigned a Fitch recovery rating of 'RR3'.
Analysis was conducted on a Fitch-stressed portfolio, which was created by Fitch and designed to address the impact of the most prominent risk presenting concentration allowances and targeted test levels to ensure that the transaction's expected performance is in line with the ratings assigned. The Fitch-stressed portfolio and notable portfolio concentration limitations are described in the press release 'Fitch Rates Guggenheim Private Debt Fund Note Issuer 2.0, LLC' dated April 12, 2016.
Fitch evaluated the second funding date structure's sensitivity to the potential variability of key model assumptions including decreases in weighted average spread or recovery rates and increases in default rates or correlation. Fitch also analysed the impact of a failure to fund commitments beyond the second funding date. Further details on additional rating sensitivities conducted at the first funding date can also be found in Fitch's press release 'Fitch Rates Guggenheim Private Debt Fund Note Issuer 2.0, LLC' dated April 12, 2016.
Fitch expects each class of notes to remain within one rating category of their original ratings even under the most extreme sensitivity scenarios. Some notes were able to withstand rating stresses within two rating categories in certain scenarios. Results under these sensitivity scenarios ranged between 'AAAsf' and 'A-' for the class A notes, 'AA-sf' and 'BB+sf' for the class B notes, 'A-sf' and 'BB-sf' for the class C notes and 'BBB+sf' and 'B+sf' for the class D notes.
One additional sensitivity scenario was run to address concentration risks regarding 'CCC' assets and industry concentrations. The indicative portfolio that Fitch had received for the second funding date included assets that have not yet been rated. Fitch considers these non-rated assets as 'CCC', according to Fitch's Issuer Default Rating (IDR) Equivalency Map, resulting in a total 'CCC' exposure of approximately 30% (excluding cash). This exceeds the 'CCC' concentration limitation of 20%, per the transaction documents. Likewise, Fitch classified 44% of the loan assets as business services, exceeding the 20% limitation for the top two industries. To address this, the sensitivity scenario increased 'CCC' concentration to 30% and increased the business services industry concentration to 40% in the Fitch stressed portfolio and second industry at 20%. Cash flow modelling results from this sensitivity scenario resulted in positive cushions for all classes of notes.
The results of the sensitivity analysis also contributed to Fitch's assignment of Stable Outlooks on each class of notes.
VARIATIONS FROM CRITERIA
Fitch analysed the transaction in accordance with its CLO rating criteria, as described in its June 2016 report, 'Global Rating Criteria for CLOs and Corporate CDOs'.
The Fitch stressed portfolio for this transaction was not created using the indicative portfolio as a basis. Rather, it was created to account for certain unique features of the transaction, which constitutes criteria variation from the current criteria and is further described in the press release 'Fitch Rates Guggenheim Private Debt Fund Note Issuer 2.0, LLC' dated April 12, 2016.
Surveillance analysis is conducted on the basis of the then-current portfolio. Fitch expects to have credit views, via either public ratings or credit opinions, on all of the PDIs that will be purchased into the portfolio. Fitch will rely on the issuer to provide it with relevant financial information on such borrowers on an ongoing basis so that Fitch may maintain its ratings on the transaction.
An assessment of the transaction's representations and warranties was also completed and found to be consistent with the ratings assigned. For further information, see 'Guggenheim Private Debt Fund Note Issuer 2.0, LLC Representations and Warranties Appendix', dated May 20, 2015.
Details of the transaction's performance are available to subscribers on Fitch's web site at 'www.fitchratings.com'.
DUE DILIGENCE USAGE
No third party due diligence was considered in the ratings process.
The second funding will not result in a rating action on the following notes, which are currently rated as follows:
--$149,000,000 Class A Notes, Series A-1, 'A-sf', Outlook Stable;
--$50,000,000 Class B Notes, Series B-1, 'BBB-sf', Outlook Stable;
--$45,000,000 Class C Notes, Series C-1, 'BBsf', Outlook Stable;
--$21,000,000 Class D Notes, Series D-1, 'Bsf', Outlook Stable.
Additional information is available at www.fitchratings.com.
The sources of information used to assess these ratings were the transaction documents provided by the manager, GPIM, and the public domain. The manager is expected to provide financial information related to the PDIs to Fitch's leveraged finance group, which used the information to establish credit opinions on these borrowers.
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)
Exposure Draft: Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 Apr 2016)
Global Rating Criteria for CLOs and Corporate CDOs (pub. 09 Jun 2016)
Global Structured Finance Rating Criteria (pub. 27 Jun 2016)
Guggenheim Private Debt Fund Note Issuer 2.0, LLC -- Appendix
Dodd-Frank Rating Information Disclosure Form