S&P: Seven Ratings On CIFC Funding 2013-II Ltd. Affirmed
Today's rating actions follow our review of the transaction's performance using data from the July 2016 trustee report. The transaction is scheduled to remain in its reinvestment period until July 2017.
Since the transaction's effective date analysis, the portfolio's credit quality has improved, as evident in the weighted average rating rising to 'B+' from 'B' and collateral seasoning. The trustee-reported portfolio weighted average life has also decreased to 4.58 years from 5.37 years. These factors have decreased the overall credit risk profile. The number of obligors in the portfolio also increased during this period, which contributed to its increased diversification.
That said, the transaction has also experienced an increase in both defaults and assets rated 'CCC+' and below since the November 2013 trustee report, which we used for our effective date analysis. Specifically, the amount of defaulted assets increased to $5.1 million (0.8% of the aggregate principal balance) as of July 2016, from none as of the November 2013 report. The level of assets rated 'CCC+' and below increased to $35.6 million (5.7% of the aggregate principal balance) from $11.6 million over the same period.
Furthermore, according to the July 2016 trustee report, the overcollateralization (O/C) ratios for each class have exhibited mild declines since the November 2013 trustee report:The class A-2 O/C ratio was 133.44%, down from 134.35%.The class A O/C ratio was 119.89%, down from 120.70%. The class B-1L O/C ratio was 112.72%, down from 113.49%.The class B-2L O/C ratio was 106.78%, down from 107.50%.Even with the decline in credit support, all coverage tests are currently passing and are above the minimum requirements. However, any significant deterioration in the O/C or other aforementioned metrics could negatively affect the deal in the future, especially the junior tranches. As such, the affirmed ratings reflect our belief that the credit support available is commensurate with the current rating levels.
On a standalone basis, the results of the cash flow analysis indicated a higher rating on the class A-2F, A-2L, A-3L, and B-1L notes. However, though the portfolio's overall credit quality has improved, due to the transaction's exposure to 'CCC' rated collateral obligations and loans from companies in the energy and commodities sectors (which have come under significant pressure from falling oil and commodity prices in the past year), we affirmed the ratings to offset any future potential credit migration in the underlying collateral.
Although the cash flow results indicated a lower rating for the class B-3L notes, as mentioned above, there has been an improvement in the portfolio's overall credit quality and the O/C ratios have remained relatively stable, with significant cushion over their minimum requirements.
Overall, the aforementioned positive and negative factors largely offset each other. However, any increase in defaults and/or par losses could lead to potential negative rating actions on the class B-3L notes in the future.
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. The results of the cash flow analysis demonstrated, in our view, that all of the rated outstanding classes have adequate credit enhancement available at the rating levels associated with these rating actions.
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.