S&P: Avery Street CLO Ltd. Ratings Raised On Three Classes; Two Ratings Affirmed
The upgrades reflect the transaction's $117.4 million in collective paydowns since our December 2013 rating actions. The remaining balance of the class A and A-2 notes was paid in the recent July 2016 payment date, and the class B fixed and B floating notes are now senior in the structure. In addition, due to failure of the class E junior notes direct-pay test earlier this year, interest was diverted to pay down $1.23 million in principal to the class E notes because of a turbo feature.
Our rating on the class C notes was driven by the application of the largest obligor default test from our corporate collateralized debt obligation criteria. The test is intended to address event and model risks that might be present in rated transactions. Despite cash flow runs that suggested higher ratings, the largest obligor default test constrained our ratings on the classC notes at 'A+ (sf)'. The top five-largest obligors in the transaction currently account for more than 31% of the portfolio's performing collateral balance
The affirmations reflect the transaction's significant exposure to long-dated assets (assets maturing after the CLO's stated maturity). Due to restructurings of the underlying assets, nearly two-thirds of the balance of the remaining performing collateral has a maturity date after the transaction's stated maturity. Even though the results of the cash flow analysis indicated a higher rating on the class D notes, our analysis, especially for the class D and E notes, considered the potential market value risk and settlement-related risk arising from the possible liquidation of the remaining securities on the transaction's legal final maturity date.
Although the cash flow results indicated a lower rating for the class E notes, we believe the credit support available is commensurate with its current 'CCC+(sf)' rating level, as well as in line with the typical scenarios associated with 'CCC+' ratings as outlined in "General Criteria: Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings," published Oct. 1, 2012.
Our review of the transaction relied in part upon a criteria interpretation with respect to our May 8, 2014 criteria, "CDOs: Mapping A Third Party's Internal Credit Scoring System To Standard & Poor's Global Rating Scale," which allows us to use a limited number of public ratings from other Nationally Recognized Statistical Rating Organizations (NRSROs) to assess the credit quality of assets not rated by S&P Global Ratings. The criteria providespecific guidance for the treatment of corporate assets not rated by S&P Global Ratings, while the interpretation outlines the treatment of securitizedassets.
We will continue to review whether, in our view, the ratings assigned to the notes remain consistent with the credit enhancement available to support them, and will take rating actions as we deem necessary.