Fitch Assigns Harvest CLO XIV Limited Expected Ratings
Class A-1A: 'AAA(EXP)sf'; Outlook Stable
Class A-1B: 'AAA(EXP)sf'; Outlook Stable
Class A-2: 'AAA(EXP)sf'; Outlook Stable
Class B-1: 'AA+(EXP)sf'; Outlook Stable
Class B-2: 'AA+(EXP)sf'; Outlook Stable
Class C: 'A+(EXP)sf'; Outlook Stable
Class D: 'BBB(EXP)sf'; Outlook Stable
Class E: 'BB(EXP)sf'; Outlook Stable
Class F: 'B-(EXP)sf'; Outlook Stable
Subordinated notes: not rated
Harvest CLO XIV Limited is a cash flow collateralised loan obligation (CLO).
The final ratings are contingent on the receipt of final documents conforming to information already received.
KEY RATING DRIVERS
'B'/'B-' Portfolio Credit Quality
Fitch expects the average credit quality of obligors to be in the 'B' category. Fitch has credit opinions or public ratings on all but one of the assets in the identified portfolio. The Fitch weighted average rating factor (WARF) of the initial portfolio is 31.1, below the covenanted maximum of 33.
High Recovery Expectations
At least 90% of the portfolio will comprise senior secured obligations. Recovery prospects for these assets are typically more favourable than for second-lien, unsecured and mezzanine assets. Fitch has assigned Recovery Ratings (RRs) to all but one of the assets in the identified portfolio. The Fitch weighted average recovery rating (WARR) of the initial portfolio is 72%, above the covenanted minimum of 67.0%.
Variable Euribor Referencing Notes
The class A-1B notes will be subject to six-month Euribor rate of interest and will receive interest and principal on a semi-annual basis. This is in contrast to all other notes which will be subject to three-month Euribor rate of interest and paid on a quarterly basis. Upon the occurrence of a frequency switch event, it is possible that class A-1B note holders, and all other class A noteholders, will be paid on alternative payment dates. In this case, cash will be provisioned for such that each noteholder retains their pro-rata, pari passu, semi-annual payment receipts via the establishment of a principal reserve account.
Diversified Asset Portfolio
The transaction contains a covenant that limits the top 10 obligors in the portfolio to 20% of the portfolio balance. In addition, the maximum Fitch industry exposure is restricted to 15% for the largest industry, and 35% for the top three. This ensures that the asset portfolio will not be exposed to excessive obligor concentration.
Limited Interest Rate Risk
Unhedged fixed-rate assets cannot exceed 5% of the portfolio while fixed-rate liabilities represent 3.75% of target par. Consequently, interest rate risk is naturally hedged for most of the portfolio through floating-rate liabilities.
Net proceeds from the notes will be used to purchase a EUR400m portfolio of European leveraged loans and bonds. The portfolio will be managed by 3i Debt Management Investments Limited. The reinvestment period is scheduled to end in 2019.
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 confirmation is considered to be given if Fitch declines to comment.
A 25% increase in the obligor default probability would lead to a downgrade of up to three notches for the rated notes. A 25% reduction in expected recovery rates would lead to a downgrade of up to five notches for the rated notes.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
All but one of the underlying assets have ratings or credit opinions from Fitch. Fitch has relied on the practices of the relevant Fitch groups to assess the asset portfolio information.
Overall, Fitch's assessment of the asset pool information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.
SOURCES OF INFORMATION
The information below was used in the analysis.
-Loan-by-loan data provided by the portfolio manager as at 18 August 2015
-Preliminary offering circular provided by the arranger as at 13 October 2015
Key Rating Drivers and Rating Sensitivities are further described in the accompanying pre-sale report, which is available at www.fitchratings.com.