Fitch Rates Canyon CLO 2016-2, Ltd./LLC
--$288,000,000 class A notes 'AAAsf'; Outlook Stable;
--$57,800,000 class B notes 'AAsf'; Outlook Stable.
Fitch does not rate the class C, D, E and subordinated notes.
Canyon CLO 2016-2, Ltd. (the issuer) and Canyon CLO 2016-2, LLC (the co-issuer) comprise an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by Canyon CLO Advisors LLC. Net proceeds from the issuance of the secured and subordinated notes will be used to purchase a portfolio of approximately $450 million of primarily senior secured leveraged loans. The CLO will have an approximately four-year reinvestment period and two-year noncall period.
KEY RATING DRIVERS
Sufficient Credit Enhancement: Credit enhancement (CE) of 36% for class A notes and 23.2% for class B notes, in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in the 'AAAsf' and 'AAsf' stress scenarios, respectively. Compared with CE levels of recent CLO issuances for notes in the same respective rating categories, the degree of CE available is in line for class A notes and below average for class B notes. However, cash flow modeling results for the two classes indicate performance in line with other Fitch-rated CLO notes at their respective ratings.
'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 and B notes are unlikely to be affected by the foreseeable level of defaults. Class A and B notes are projected to be able to withstand default rates of up to 60.3% and 55.5%, respectively.
Strong Recovery Expectations: The indicative portfolio consists of 96.9% first lien senior secured loans. Approximately 89.9% 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 77.9%. In determining the class A and B note ratings, Fitch stressed the indicative portfolio by assuming a higher portfolio concentration of assets with lower recovery prospects and further reduced recovery assumptions of higher rating stress assumptions, resulting in 39.6% and 47.8% recovery rate assumptions in Fitch's 'AAAsf' and 'AAsf' scenarios, respectively.
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 and B 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 notes and 'BBB-sf' and AAAsf for the class B 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 is available by accessing the appendix referenced under "Related Research" below. 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. However, the offering document of this transaction included a draft of the indenture as a supplemental exhibit, which contains RW&Es related to the underlying asset pool of the CLO. For further information, please see Fitch's Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions,' dated May 31, 2016.