S&P: Ten Ratings On Emerson Park CLO Ltd. Affirmed
Today's rating actions follow our review of the transaction's performance using data from the Aug. 6, 2016, trustee report. The transaction is scheduled to remain in its reinvestment period until July 2017.
Since the transaction's effective date in November 2013, the trustee-reported collateral portfolio weighted average life decreased to 4.70 years from 5.36 years. This seasoning, combined with the stable credit quality, has decreased the overall credit risk profile, which, in turn, has provided more cushion to the tranche ratings. In addition, the number of obligors in the portfolio increased during this period, contributing to the portfolio's increased diversification.
Both defaults and assets rated 'CCC+' and below also increased over the same period. Specifically, the amount of defaulted assets increased to $4.09 million (0.83% of the aggregate principal balance) as of August 2016 from zero as of the November 2013 effective date report. The level of assets rated 'CCC+' and below increased to $14.75 million (3.00% of the aggregate principal balance) from zero.
The increase in defaulted assets, as well as other factors, has affected the level of credit support available to all tranches, as seen by the decline in the overcollateralization (O/C) ratios:The class A/B O/C ratio was 132.94%, down from 134.57%.The class C O/C ratio was 119.47%, down from 120.94%. The class D O/C ratio was 112.29%, down from 113.67%.The class E O/C ratio was 106.61%, down from 107.92%.Even with the decline in credit support, all coverage tests are currently passing and are above the minimum requirements.
Overall, the increase in defaulted assets has been largely offset by the decline in the weighted average life. However, any significant deterioration in these 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.
Although our cash flow analysis indicates higher ratings for the class B-1, B-2, C-1, C-2, and D notes, our rating actions consider additional sensitivity runs that considered the exposure to specific distressed industries and allowed for volatility in the underlying portfolio given that the transaction is still in its reinvestment period.
Although the cash flow results indicated a lower rating for the class E notes, we view the overall credit seasoning as an improvement and also considered that the O/C ratios are above their minimum requirements. However, any increase in defaults and/or par losses could lead to potential negative rating actions on the class E notes in the future.
Our review of the transaction relied, in part, upon a criteria interpretation with respect to our May 2014 criteria, "CDOs: Mapping A Third Party's Internal Credit Scoring System To Standard & Poor's Global Rating Scale," which allows us to use a limited number of public ratings from other Nationally Recognized Statistical Rating Organizations (NRSROs) to assess the credit quality of assets not rated by S&P Global Ratings. The criteria provide specific guidance for the treatment of corporate assets not rated by S&P Global Ratings, while the interpretation outlines the treatment of securitized assets.
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.