NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded one and affirmed five classes of notes issued by Newstar Commercial Loan Trust 2007-1 (NewStar 2007-1). Fitch has also revised the Outlooks on two classes of notes. A complete list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The affirmations and upgrade on the class C notes are the result of increased credit enhancement levels due to the significant amortization of the capital structure and the cushions available in Fitch's cash flow modelling results, tempered by the growing concentration risks of the amortizing portfolio.
As of the June 2016 trustee report, approximately 98% of the class A-1 and class A-2 (collectively, class A) notes' original balance has been paid and $7.9 million of class A notes remain outstanding. However, the portfolio has experienced credit deterioration, charging off approximately $1.9 million and $5.5 million in May and June, respectively, totalling $7.4 million. Fitch currently considers 38.2% of the total commitments (excluding charge-offs and principal cash) in the 'CCC' category, as compared to 13.2% in the last review, based on Fitch's Issuer Default rating (IDR) Equivalency Map. In addition, approximately 68.3% of the portfolio has strong recovery prospects or a Fitch assigned Recovery Rating of 'RR2' or higher. There are currently 38 obligors in the loan portfolio, compared to 61 obligors at last review.
The notes for NewStar 2007-1 benefited from the application of excess spread via the additional principal amount (APA). For every dollar that is charged off of the performing portfolio, the APA feature directs recoveries from charged-off loans and excess interest proceeds otherwise available to the certificate holders to pay down the senior-most notes in an amount equal to the charged-off amount. The class E notes deferred $176 thousand of interest payments on the May 2016 payment date due to the diversion of $1.9 million of interest proceeds to pay the APA. Fitch expects the class E notes to continue to defer interest as the APA has increased by $5.5 million for the next payment date.
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 Negative Outlook for the class E notes reflects the notes' increased sensitivities to the portfolio's growing concentration risks, based on Fitch's cash flow modelling results. The Stable Outlooks on all other notes reflect the notes' robust cushions available to withstand future potential deterioration in the underlying portfolio.
The ratings of the notes may be sensitive to the following: asset defaults, significant negative credit migration, lower than historically observed recoveries for defaulted assets, and breaches of concentration limitations or portfolio quality covenants.
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 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. To address the risk of a decreased weighted average spread (WAS), Fitch ran an additional stress, assuming a minimum covenanted WAS of 3.80%, without LIBOR floors. As a result, the class A, B and C notes are able to perform at or above their current ratings in both scenarios, while the class D notes showed some sensitivity towards declining spread assumptions. The class E notes performed at rating levels below their current rating category in both sensitivity scenarios.
NewStar 2007-1 is a collateralized debt obligation (CDO) that closed on June 5, 2007 and is managed by NewStar Financial, Inc. (NewStar). The transaction's reinvestment period ended in May 2013, and its final legal maturity date is in September 2022. NewStar 2007-1 is secured by a portfolio composed of 96.2% corporate loans, primarily to middle-market issuers, and 3.8% CLO bonds, based on the total commitment amounts. Fitch's leveraged finance group provided model-based credit opinions for a majority of the loans in the portfolio, based on financial statements provided to Fitch by NewStar.
DUE DILIGENCE USAGE
No third party due diligence was reviewed in relation to this rating action.
Fitch has upgraded and revised the Rating Outlook for the following:
--$58,500,000 class C notes to 'AAsf' from 'Asf'; Outlook revised from Positive to Stable.
Fitch has affirmed and revised the Rating Outlook for the following:
--$6,038,654 class A-1 notes at 'AAAsf'; Outlook Stable;
--$1,899,611 class A-2 notes at 'AAAsf'; Outlook Stable;
--$24,000,000 class B notes at 'AAAsf'; Outlook Stable;
--$27,000,000 class D notes at 'BBB+sf'; Outlook Stable;
--$29,100,000 class E notes at 'BBsf'; Outlook revised from Stable to Negative.
Fitch does not rate the class F notes.
Additional information is available at www.fitchratings.com.
Sources of Information:
The sources of information used to assess these ratings were periodic trustee reports, NewStar and the public domain.
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 18 Jul 2016)
Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 17 May 2016)
Global Rating Criteria for CLOs and Corporate CDOs (pub. 28 Jul 2016)
Global Structured Finance Rating Criteria (pub. 27 Jun 2016)
Dodd-Frank Rating Information Disclosure Form