Fitch Assigns Toro European CLO 2 DAC Final Ratings
Class A: 'AAAsf'; Outlook Stable
Class B: 'AAsf'; Outlook Stable
Class C: 'Asf'; Outlook Stable
Class D: 'BBBsf'; Outlook Stable
Class E: 'BBsf'; Outlook Stable
Class F: 'B-sf'; Outlook Stable
Subordinated notes: not rated
Toro European CLO 2 is a cash flow collateralised loan obligation (CLO). Net proceeds from the notes were used to purchase a EUR350m portfolio of mostly European leveraged loans and bonds. The portfolio is managed by Chenavari Credit Partners LLP. The reinvestment period is scheduled to end in 2020.
KEY RATING DRIVERS
'B'/'B-' Portfolio Credit Quality
Fitch places the average credit quality of obligors in the 'B'/'B-' range. The agency has public ratings or credit opinions on all the obligors in the identified portfolio. The Fitch weighted average rating factor of the identified portfolio is 34.
High Expected Recoveries
The portfolio will be at least 90% senior secured obligations. The Fitch weighted average recovery rate of the identified portfolio is 77.3%.
Payment Frequency Switch
The notes pay quarterly, while the portfolio assets can be reset to semi-annual from quarterly or monthly. The transaction has an interest-smoothing account but no liquidity facility. Liquidity stress for the non-deferrable class A and B notes, stemming from a large proportion of assets potentially resetting to semi-annual in any one quarter, is addressed by switching the payment frequency of the notes to semi-annual in such a scenario, subject to certain conditions.
Limited Interest Rate Risk Exposure
Between 0% and 5% of the portfolio can be invested in fixed-rate assets, while the liabilities pay a floating-rate coupon. Fitch modelled both 0% and 5% fixed-rate buckets and found that the rated notes can withstand the interest rate mismatch associated with each scenario.
At closing the issuer purchased an interest rate cap to hedge the transaction against rising interest rates. The notional of the cap is EUR10m (representing 2.86% of the target par amount) and the strike rate is 2%. The cap will expire five years after the closing date.
Hedged Non-Euro Asset Exposure
The transaction is permitted to invest up to 30% of the portfolio in non-euro assets, provided perfect asset swaps can be entered into.
The transaction documents may be amended subject to rating agency confirmation or noteholder approval. Where rating agency confirmation relates to risk factors, Fitch will analyse the proposed change and may provide a rating action commentary if the change has a negative impact on the ratings. Such amendments may delay the repayment of the notes as long as Fitch's analysis confirms the expected repayment of principal at the legal final maturity.
If in the agency's opinion the amendment is risk-neutral from a rating perspective Fitch may decline to comment. Noteholders should be aware that the structure considers the confirmation to be given if Fitch declines to comment.
A 25% increase in the obligor default probability would lead to a downgrade of up to two notches for the rated notes. A 25% reduction in expected recovery rates would lead to a downgrade of up to three notches for the rated notes.
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO RULE 17G-10
Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.
The majority of the underlying assets have ratings or credit opinions from Fitch and/or other Nationally Recognised Statistical Rating Organisations and/or European Securities and Markets Authority registered rating agencies. Fitch has relied on the practices of the relevant groups within Fitch and/or other rating agencies to assess the asset portfolio information.
SOURCES OF INFORMATION
The information below was used in the analysis.
-Loan-by-loan data provided by the arranger as at 14 July 2016
-Offering circular provided by the arranger as at 28 September 2016
REPRESENTATIONS AND WARRANTIES
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 EMEA leveraged finance CLOs typically do not include RW&Es that are available to investors and that relate to the asset pool underlying the CLO. Therefore, Fitch credit reports for EMEA leveraged finance CLO offerings will not typically include descriptions of RW&Es. For further information, see Fitch's Special Report titled "Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions," dated 21 January 2016.