Fitch Rates Mill Creek CLO II, Ltd./LLC
OREANDA-NEWS. Fitch Ratings assigns the following ratings and Rating Outlooks to Mill Creek CLO II, Ltd./LLC:
--$196,500,000 class A notes 'AAAsf', Outlook Stable;
--$25,500,000 class B notes 'AAsf', Outlook Stable;
--$15,600,000 class C notes 'Asf', Outlook Stable;
--$18,000,000 class D notes 'BBB-sf', Outlook Stable.
Fitch does not rate the class E or subordinated notes.
Mill Creek CLO II, Ltd. (the issuer) and Mill Creek CLO II, LLC (the co-issuer) comprise an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by CreekSource LLC (CreekSource). Net proceeds from the issuance of the secured and subordinated notes will be used to purchase a portfolio of approximately $300 million of primarily senior secured leveraged loans. The CLO will have a four-year reinvestment period and two-year noncall period.
KEY RATING DRIVERS
Sufficient Credit Enhancement: Credit enhancement (CE) available to the notes, in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in the respective rating stress scenarios. The degree of CE available to the class A notes is lower than the average CE of recent CLO issuances; however, cash flow modeling indicates performance in line with other 'AAAsf' rated CLO notes. The degree of CE available for the class B, C, and D notes is above average for notes in the same respective rating categories in recent CLO issuances.
'B+/B' Asset Quality: The average credit quality of the indicative portfolio is 'B+/B', which is in line with that of recent CLOs. Issuers rated in the 'B' rating category denote a highly speculative credit quality; however, in Fitch's opinion, each class of rated notes is projected to be sufficiently robust against default rates in line with its applicable rating stress.
Strong Recovery Expectations: The indicative portfolio consists of 100.0% first lien senior secured loans. Approximately 95.8% of the indicative portfolio has either strong recovery prospects or a Fitch-assigned recovery rating of 'RR2' or higher, with 33.7% consisting of assets with a Fitch-assigned recovery rating of 'RR1'; the base case recovery assumption is 81.7%. In determining the ratings for each class of notes, 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 stress assumptions. The recovery rates for the class A, B, C, and D notes used in the analysis of Mill Creek CLO II are 42.2%, 51.0%, 55.8%, and 62.3%, respectively. These stress recovery levels are higher than the average recovery assumptions for recent CLOs, which is primarily driven by the large proportion of assets with a Fitch-assigned recovery of 'RR1', as noted above.
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, while the class C notes are expected to remain within two rating categories of their assigned rating and the class D notes are expected to remain within three rating categories of their assigned rating, even under the most extreme sensitivity scenarios.
Results under these sensitivity scenarios ranged between 'Asf' and 'AAAsf' for the class A notes, between 'BBB-sf' and 'AAAsf' for the class B notes, between 'BB-sf' and 'A+sf' for the class C notes, and between 'CCCsf' and 'A-sf' for the class D notes.
Fitch published an exposure draft of its Counterparty Criteria for Structured Finance and Covered Bonds on April 14, 2016. The exposure draft serves as the operative criteria report for this ratings analysis. Under the exposure draft, a direct support counterparty is expected to maintain a long-term rating of at least 'A' or a short-term rating of at least 'F1' in order to support note ratings of up to 'AAAsf'. The issuer's account holder, Wells Fargo Bank N.A., satisfies the minimum expected ratings threshold for a direct support counterparty under the exposure draft framework.
Fitch's existing counterparty criteria (dated May 14, 2014) expects this role to be fulfilled by an institution with a long-term rating of at least 'A' and a short-term rating of at least 'F1'. Wells Fargo's long-term rating currently meets this expectation, but the indenture provisions give the optionality of either a long- or short-term rating. Fitch notes that Wells Fargo's short-term rating of 'F1' is in line with the expectation for short-term ratings under Fitch's existing counterparty criteria, and that the role of issuer account holder poses inherently short-term risk to the CLO. Therefore, the rating recommendation for each class of notes remains achievable under Fitch's existing criteria.
The framework regarding expectations for qualified investments has not materially changed between the existing criteria and the exposure draft.