Fitch to Rate LCM XXII Ltd./LLC; Issues Presale
--$252,000,000 class A-1 notes 'AAAsf'; Outlook Stable;
--$2,400,000 class X notes 'AAAsf'; Outlook Stable.
Fitch does not expect to rate the class A-2, B, C or D notes or the class I subordinated notes.
LCM XXII Ltd. (the issuer) and LCM XXII LLC (the co-issuer) comprise an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by LCM Asset Management LLC (LCM). Net proceeds from the issuance of the secured notes and class I subordinated notes will be used to purchase a portfolio of approximately $400 million of primarily senior secured leveraged loans. The CLO will have an approximately five-year reinvestment period and a two-year noncall period.
KEY RATING DRIVERS
Sufficient Credit Enhancement: Credit enhancement (CE) of 37% for class A-1 notes, in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in an 'AAAsf' stress scenario. The degree of CE available to class A-1 notes is in line with the average CE of recent CLO issuances, and cash flow modeling indicates performance in line with other 'AAAsf' CLO notes. Class X notes are expected to be paid in full from the application of interest proceeds via the interest waterfall.
'B+/B' Asset Quality: The average credit quality of the indicative portfolio is 'B+/B', which is comparable with recent CLOs. Issuers rated in the 'B' rating category denote a highly speculative credit quality; however, in Fitch's opinion, class A-1 and X notes are unlikely to be affected by the foreseeable level of defaults. Class A-1 and X notes are projected to be able to withstand default rates of up to 62.7% and 95.8%, respectively.
Strong Recovery Expectations: The indicative portfolio consists of 98.5% first-lien senior secured loans. Approximately 93.4% of the indicative portfolio has strong recovery prospects or a Fitch-assigned recovery rating of 'RR2' or higher, and the base case recovery assumption is 82.2%. In determining the notes' ratings, 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 scenarios, resulting in a 39.9% recovery rate in Fitch's 'AAAsf' 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 A-1 and X notes to remain investment grade, even under the most extreme sensitivity scenarios. Results under these sensitivity scenarios ranged between 'A+sf' and 'AAAsf' for the class A-1 notes and were 'AAAsf' for the class X notes.
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 31 May 2016.