Fitch to Rate Arch Street CLO, Ltd./LLC; Issues Presale
--$2,500,000 class X notes 'AAAsf', Outlook Stable;
--$256,000,000 class A notes 'AAAsf', Outlook Stable;
--$20,000,000 class C notes 'Asf', Outlook Stable;
--$22,750,000 class D notes 'BBB-sf', Outlook Stable.
Fitch does not expect to rate the class B, E, F or subordinated notes.
Fitch was not asked to rate the class B notes. Modeling results for these notes indicate performance in line with an 'AAsf' rating.
Arch Street CLO Ltd. (the issuer) and Arch Street CLO LLC (the co-issuer) comprise an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by NewStar Capital LLC. Net proceeds from the issuance of the secured and subordinated notes will be used to purchase a portfolio of approximately $400 million of primarily senior secured leveraged loans. The CLO will approximately have a four-year reinvestment period and a two-year noncall period.
KEY RATING DRIVERS
Sufficient Credit Enhancement: Credit enhancement (CE) available to the notes, in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in the respective rating stress scenarios. The degree of CE available to class A, C and D notes (the rated notes) are in line with the average CE of notes at the same rating level in recent CLO issuances. Class X notes are expected to be paid in full from the application of interest proceeds on the first or second payment date.
'B+/B' Asset Quality: The average credit quality of the indicative portfolio is in the lower end of the 'B+/B' weighted average rating factor (WARF) range, which is better than most recent Fitch-rated CLOs. Issuers rated in the 'B' rating category denote a highly speculative credit quality; however, in Fitch's opinion, each class of rated notes is projected to be sufficiently robust against default rates, in line with its applicable rating stress.
Strong Recovery Expectations: The indicative portfolio consists of 100.0% first lien senior secured loans. Approximately 95.9% of the indicative portfolio has either strong recovery prospects or a Fitch-assigned Recovery Rating of 'RR2' or higher, and the base case recovery assumption is 80.4%. In determining the ratings for each class of rated 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 analysis of class X, A, C and D notes assumed recovery rates of 39.8%, 39.8%, 52.9% and 59.7% for their respective ratings' scenario.
Fitch evaluated the structure's sensitivity to the potential variability of key model assumptions, including decreases in recovery rates and increases in default rates or correlation. Fitch expects the class X and A notes to remain investment grade and class C and D notes to remain within two rating categories of their assigned ratings, even under the most extreme sensitivity scenarios. Results under these sensitivity scenarios ranged between 'AA+sf' and 'AAAsf' for the class X notes, 'A+sf' and 'AAAsf' for the class A notes, 'BB+sf' and 'A+sf' for the class C notes and 'B-sf' and 'BBB+sf' for the class D notes.
Key Rating Drivers and Rating Sensitivities are further described in the accompanying presale report, which is available to investor's on Fitch's website at 'fitchratings. com'.
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10
Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.
REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS
A description of the transaction's representations, warranties and enforcement mechanisms ("RW&Es") that are disclosed in the offering document and which relate to the underlying asset pool was not prepared for this transaction. Offering documents for U. S. CLO transactions do not typically include RW&Es that are available to investors and that relate to the asset pool underlying the security. Therefore, Fitch credit reports for U. S. CLO transactions will not typically include descriptions of RW&Es. For further information, please see Fitch's Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions,' dated May 31, 2016.