Fitch to Rate Regatta VII Funding Ltd./LLC; Presale Issued
--$256,000,000 Class A Notes, 'AAA(EXP)sf', Outlook Stable;
--$48,000,000 Class B Notes, 'AA(EXP)sf', Outlook Stable.
Fitch does not expect to rate the class C, D, E or subordinated notes.
Regatta VII Funding Ltd. (the issuer) and Regatta VII Funding LLC (the co-issuer) constitute an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by Regatta Loan Management LLC (RLM). Net proceeds from the issuance of the secured notes and subordinated securities will be used to purchase a portfolio of approximately $400 million primarily senior secured leveraged loans. The CLO will have an approximately four-year reinvestment period and a two-year noncall period.
KEY RATING DRIVERS
Sufficient Credit Enhancement: Credit enhancement (CE) of 36.0% for class A notes and 24.0% 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. The degree of CE available to class A and B notes is in line with the average CE of recent CLO issuances.
'B' Asset Quality: The average credit quality of the indicative portfolio is approximately '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 61.1% and 56.3%, respectively.
Strong Recovery Expectations: The indicative portfolio consists of 98.3% first lien senior secured loans. Approximately 92.8% 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 79.9%. 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 for higher rating stresses, resulting in 37.6% and 46.0% recovery rates 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 AA+sf for the class B 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' or by clicking on the link.
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.