Fitch Rates Ares XXXV CLO Ltd./LLC
--\\$271,000,000 class A senior secured floating rate notes 'AAAsf'; Outlook Stable.
Fitch does not rate the class B, C, D, E or subordinated notes.
Ares XXXV CLO Ltd. (the issuer) and Ares XXXV CLO LLC (the co-issuer) comprise an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by Ares CLO Management LLC (Ares). Net proceeds from the issuance of the secured and subordinated notes will be used to purchase a portfolio of approximately \\$400 million of primarily senior secured leveraged loans. The CLO will have an approximately two-year reinvestment period and a two-year noncall period.
KEY RATING DRIVERS
Sufficient Credit Enhancement: Credit enhancement (CE) of 32.3% for the class A notes, in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in a 'AAAsf' stress scenario. The degree of CE available to class A notes is lower than the average CE of recent CLO issuances; however, cash flow modeling indicates performance in line with other 'AAAsf' CLO notes. Additionally the lower CE is offset by deal characteristics such as the lower cost of senior note funding, a relatively low weighted average life and second lien bucket, and tighter overcollateralization test triggers.
'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 a highly speculative credit quality; however, in Fitch's opinion, class A notes are unlikely to be affected by the foreseeable level of defaults. Class A notes are projected to be able to withstand default rates of up to 57%.
Strong Recovery Expectations: The indicative portfolio consists of 97.5% first lien senior secured loans. Approximately 85.9% of the indicative portfolio has either strong recovery prospects or a Fitch-assigned Recovery Rating of 'RR2' or higher, resulting in a base case recovery assumption of 76.1%. In determining the class A notes ratings, 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 analysis of class A notes assumed a 37.4% recovery rate in Fitch's 'AAAsf' scenario.
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 notes to remain investment grade even under the most extreme sensitivity scenarios. Results under these sensitivity scenarios ranged between 'A-sf' and 'AAAsf' for the class A notes.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
The publication of a representations, warranties and enforcement mechanisms appendix is not required for this transaction.