S&P: Battalion CLO IV Ltd. Ratings Affirmed On Six Classes
Today's rating actions follow our review of the transaction's performance, using data from the Sept. 7, 2016, trustee report. The transaction is scheduled to remain in its reinvestment period until October 2017.
Since the transaction's effective date in November 2013, the trustee-reported collateral portfolio's weighted average life has decreased to 4.48 years from 5.71 years. This seasoning has decreased the overall credit risk profile, which, in turn, provided more cushion to the tranche ratings.
The transaction experienced an increase in both defaults and assets rated 'CCC+' and below since the effective date. Specifically, the amount of 'CCC+'-and-below-rated assets increased to $27.57 million (6.9% of the aggregate principal balance) as of September 2016, from $5.25 million as of the effective date. The level of defaulted assets increased to $1.2 million from none over the same period.
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 mild decline in the overcollateralization (O/C) ratios:The class A O/C ratio was 136.92%, down from 137.69% reported in November 2013.The class B O/C ratio was 122.22%, down from 122.91%. The class C O/C ratio was 114.50%, down from 115.14%.The class D O/C ratio was 108.57%, down from 109.18%.However, the current coverage test ratios are all passing and well above their minimum threshold values.
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.
Although our cash flow analysis indicated higher ratings for the class A-2, B, C, and D notes, our rating actions considered the increase in defaulted and 'CCC+'-and-below-rated assets, relatively higher exposure to the energy and commodity sectors, and higher-than-average exposure to assets with a negative rating outlook. This therefore allowed for volatility in the underlying portfolio given that the transaction is still in its reinvestment period.
In addition, while the cash flow results indicated a lower rating for the class E notes, we view the overall credit seasoning as an improvement to the transaction and also considered the relatively stable O/C ratios that currently have significant cushion over their minimum requirements. However, any increase in defaults and/or par losses could lead to potential negative rating actions on the notes in the future.
The affirmed ratings reflect our view that the credit support available is commensurate with the current rating levels.
Our review of this transaction included a cash flow analysis, based on the portfolio and transaction as reflected in the September 2016 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.
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 we will take further rating actions as we deem necessary.