S&P: Apidos CLO XIV Ratings Raised On Four Classes; Four Ratings Affirmed
Today's rating actions follow our review of the transaction's performance, using data from the July 7, 2016, trustee report. The transaction is scheduled to remain in its reinvestment period until October 2017.
The upgrades primarily reflect improved credit quality in the underlying collateral since our effective date rating affirmations in December 2013.
The concentration of the underlying portfolio with an S&P Global Ratings' credit rating of 'BB-' or higher has increased significantly from the September 2013 effective date report used for our previous rating action. This higher-rated collateral has resulted in a decrease in reported weighted average spread to 3.86% from 4.37% and a corresponding increase in the weighted average S&P Global Ratings recovery rate. The portfolio's weighted average rating remains 'B+'.
The transaction has benefited from collateral seasoning, with the reported weighted average life decreasing to 4.55 years from 5.46 years in September 2013. This seasoning, combined with the improved credit quality, has decreased the overall credit risk profile. In addition, the number of issuers in the portfolio has increased during this period, resulting in improved portfolio diversification.
The transaction has experienced an increase in both defaults and assets rated 'CCC+' and below since the September 2013 effective date. Specifically, the amount of defaulted assets increased to $4.21 million as of July 2016 from zero as of the effective date. The par balance of underlying collateral rated 'CCC+' and below increased to $22.01 million from $11.89 million over the same period. Overall, the increase in defaulted assets and assets rated 'CCC+' and below has been largely offset by the decline in the weighted average life and positive portfolio credit migration of the collateral portfolio.
The increase in defaulted assets, a par loss on the underlying collateral of $2.85 million, and other factors have affected the level of credit support available to all tranches, as seen by the mild decline in the overcollateralization (O/C) ratios since the effective date:The class A/B O/C ratio was 128.32%, down from the 129.74%.The class C O/C ratio was 120.30%, down from 121.63%. The class D O/C ratio was 113.01%, down from 114.26%.The class E O/C ratio was 107.51%, down from 108.70%.However, the current coverage test ratios are all passing and well above their minimum threshold values.
Although our cash flow analysis indicated higher ratings for the class C-1, C-2, D, and E notes, our rating actions consider additional sensitivity runs that allowed for volatility in the underlying portfolio given that the transaction is still in its reinvestment period.
On a standalone basis, the results of the cash flow analysis pointed to a lower rating on the class F notes than today's rating action suggests. However, we believe that as the transaction enters its amortization period following the end of its reinvestment period, the transaction may begin to pay down the rated notes sequentially, starting with the class A notes, which, all else remaining equal, will begin to increase the O/C levels. In addition, because the transaction currently has minimal exposure to 'CCC' rated collateral obligations and no exposure to long-dated assets (i. e., assets maturing after the CLO's stated maturity), we believe it is not currently exposed to large risks that would impair the current rating on the notes. In line with this, we affirmed the rating on the class F notes.
The affirmations of the ratings on the class A, D, E, and F notes reflect our belief that the credit support available is commensurate with the current rating levels.
Our review of this transaction included a cash flow analysis, based on the portfolio and transaction as reflected in the aforementioned trustee report, to estimate future performance. In line with our criteria, our cash flow scenarios applied forward-looking assumptions on the expected timing and pattern of defaults, and recoveries upon default, under various interest rate and macroeconomic scenarios. In addition, our analysis considered the transaction's ability to pay timely interest and/or ultimate principal to each of the rated tranches.
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.