Fitch Rates TCI-Symphony CLO 2016-1 Secured Ltd.
--$33,000,000 secured notes 'A-sf', Outlook Stable.
The rating of the secured notes addresses the ultimate receipt of the secured notes' rated balance in accordance with the terms of the notes.
TRANSACTION SUMMARY
TCI-Symphony CLO 2016-1 Secured Ltd. has issued a class of secured notes which are collateralized by $3,000,000 of the class B-2 notes and $25,000,000 of the class C-2 notes from TCI-Symphony CLO 2016-1 Limited/LLC (TCI-Symphony CLO 2016-1). The secured notes are also collateralized by $5,000,000 of income notes from TCI-Symphony CLO 2016-1 Income Note Issuer Ltd., which represent indirect interests in the class I subordinated notes held by TCI-Symphony CLO 2016-1. The class B-2, C-2 and income notes shall herein be referred to as the underlying components.
The secured noteholders are entitled to all distributions of principal and interest on the underlying components in the respective proportions thereof and amortize upon the receipt of these cash flows.
Fitch's rating of the secured notes addresses the likelihood of ultimate repayment of its initial balance by the stated maturity date in October 2029. Once the secured notes' rated balance is reduced to zero, the note will automatically be exchanged for the remaining underlying components. This mandatory exchange ensures there will be no divergence between the Fitch rated balance and the outstanding stated balance of the secured notes.
KEY RATING DRIVERS
Sufficient Credit Enhancement: Credit enhancement provided by the underlying components is sufficient to protect against portfolio default and recovery assumptions in a 'A-sf' stress scenario.
FITCH ANALYSIS
Analysis of the underlying components was conducted on both the indicative portfolio presented to Fitch for TCI-Symphony CLO 2016-1 and its Fitch stressed portfolio, which was created to address the impact of the most prominent risk-presenting concentration allowances and collateral quality tests pursuant to TCI-Symphony CLO 2016-1's governing documents. The assumptions for the Fitch stressed portfolio and indicative portfolio are further described in TCI-Symphony CLO 2016-1's new issue report, which is available to investors on Fitch's website at 'www. fitchratings. com'.
Under an 'A-sf' stress, the secured notes are expected to receive repayment of their full $33,000,000 principal balance in all nine cash flow scenarios in both the indicative and Fitch stressed portfolios. Cash flows from each underlying component in the most constraining scenarios are highlighted in further detail below:
--Indicative portfolio analysis: $3.5 million from the underlying class B-2 notes, $29.9 million from the underlying class C-2 notes, and $0.2 million from the underlying income notes.
--Fitch stressed portfolio analysis: $3.7 million from the underlying class B-2 notes, $32.6 million from the underlying class C-2 notes, and $0.04 million from the underlying income notes.
The most stressful scenario at the 'A-sf' PCM hurdle rate for both the indicative and Fitch stressed portfolios occurs in a downward interest rate environment with front-loaded defaults. The indicative portfolio results in the lowest cash flows because the shorter weighted average life limits the amount of interest proceeds that may be used to repay principal of the combination securities over the life of the transaction.
The transaction is heavily reliant on proceeds from TCI-Symphony CLO 2016-1's class C-2 notes which constitute 80% of the secured notes rated balance. Though Fitch was not asked to rate the class C-2 notes, modelling results for these notes indicate performance in line with an 'A-sf' rating. As a result, Fitch is comfortable in assigning an 'A-sf' rating to the secured notes, albeit cash flows in Fitch's higher rating stresses may exceed the initial rated balance.
EXCHANGE MECHANISMS AND OTHER STRUCTURAL FEATURES
A secured noteholder may exchange its secured notes for a proportional share of each of the underlying components at any time. Such an exchange would be credit neutral since the holder would still be entitled to the same payments from the underlying components as it was prior to the exchange. However, if all secured notes are exchanged for their underlying components, Fitch would withdraw its rating on the secured notes.
An exchange is also triggered if there is a secured notes exchange event. Such event will occur upon any of the following situations:
--The date on which the secured notes rated balance is reduced to zero by distributions on the underlying components.
--The date on which no underlying components other than the income notes remains outstanding after giving effect to any substitution of refinancing obligations in connection with a partial refinancing of the underlying components.
--Unless the obligations providing the refinancing are being substituted for each underlying component being redeemed, any partial refinancing date on which one or more but not all underlying components are redeemed or retired.
--All holders of the secured notes direct the secured notes paying agent to tender some or all the underlying components to TCI-Symphony CLO 2016-1 for repurchase.
--Unless the secured notes issuer has been directed by all holders of the secured notes to consent to a proposed re-pricing of an underlying component, the re-pricing date with respect to such underlying component.
Provisions within the governing documents of the secured notes give investors the ability to take actions which could result in different outcomes than those assumed by Fitch in its ratings analysis. This may include, inter alia, a refinancing or repricing of the class B-2 or C-2 notes. Any such event would require 100% consent from the noteholders prior to taking such action. If less than 100% of the secured noteholders agree this would trigger an exchange event, as described above. Fitch's rating does not address the potential impact from such investor optionality.
RATING SENSITIVITIES
Fitch evaluated the secured notes' sensitivity to the potential variability of key model assumptions for the underlying components, including decreases in recovery rates and increases in default rates or correlation. While the scenario with the most constraining cash flows for the secured notes is in the indicative portfolio analysis, Fitch ran the sensitivity scenarios on the Fitch stressed portfolio as this scenario generally resulted in the lowest passing ratings given the higher PCM hurdle rate in the Fitch stressed portfolio.
Fitch expects the secured notes to remain within two rating categories of their assigned rating, even under the most extreme sensitivity scenarios. Results under these sensitivity scenarios ranged between 'BBsf' and 'AA+sf' for the secured 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 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.
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