Fitch to Rate Flatiron CLO 2015-1 Ltd./LLC; Issues Presale
--\$3,000,000 class X senior secured floating rate notes, 'AAAsf'; Outlook Stable;
--\$255,000,000 class A senior secured floating rate notes, 'AAAsf'; Outlook Stable.
Fitch does not expect to rate the class B, C, D, E, F or subordinated notes.
Flatiron CLO 2015-1 Ltd. and Flatiron CLO 2015-1 LLC (together Flatiron 2015-1, or the issuer) comprise an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by NYL Investors LLC (NYL Investors). Net proceeds from the issuance will be used to purchase assets to reach a target portfolio of approximately \$400 million of primarily senior secured leveraged loans. The CLO will have a four-year reinvestment period.
KEY RATING DRIVERS
Sufficient Credit Enhancement: Credit enhancement (CE) of 36.3% for class A notes, in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in 'AAAsf' stress scenarios. The level of CE for class A is slightly below the average for recent CLO issuances. Class X notes are expected to be paid in full from interest proceeds on or before the second payment date.
'B' Asset Quality: The average credit quality of the indicative portfolio is 'B', which is comparable to recent CLOs. Issuers rated in the 'B' rating category denote relatively weak credit quality; however, in Fitch's opinion, the class X and A notes are unlikely to be affected by the foreseeable level of defaults. The class X and A notes are robust against default rates of up to 71.2% and 59.1%, respectively.
Strong Recovery Expectations: The indicative portfolio consists of 97.1% senior secured loans, of which about 88.2% have strong recovery prospects or a Fitch-assigned Recovery Rating of 'RR2' or higher, and the base case recovery assumption is 76.4%. In determining the ratings for the class X and A 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 stresses, resulting in 34.9% recovery rate assumption in Fitch's 'AAAsf' scenario.
In addition to Fitch's stated criteria, the agency analyzed the structure's sensitivity to the potential variability of key model assumptions including decreases in weighted average spread or recovery rates and increases in default rates or correlation. The class X and A notes are expected to remain investment grade even under the most extreme sensitivity scenarios; results ranged between 'AAsf' and 'AAAsf' for class X notes and between 'A-sf' and 'AAAsf' for class A notes.
The expected ratings are based on information provided to Fitch as of Feb. 20, 2015. Sources of information used to assess these ratings were provided by the arranger, Morgan Stanley & Co. LLC, and the public domain. Key Rating Drivers and Rating Sensitivities are further described in the accompanying presale report.
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