Fitch to Rate LCM XX Limited Partnership; Issues Presale
--$315,000,000 class A notes 'AAAsf'; Outlook Stable.
Fitch does not expect to rate the class B, C, D or E notes or the LP Certificates.
LCM XX Limited Partnership (the issuer) and LCM XX LLC (the co-issuer) comprise an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by LCM Asset Management LLC (LCM). Net proceeds from the issuance of the secured notes and limited partnership (LP) certificates will be used to purchase a portfolio of approximately $500 million of primarily senior-secured leveraged loans. The CLO will have an approximately five-year reinvestment period and a three-year noncall period.
KEY RATING DRIVERS
Sufficient Credit Enhancement: Credit enhancement (CE) of 37.0% for 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 in line with the average CE of recent CLO issuances, and cash flow modeling indicates performance in line with other 'AAAsf' CLO notes.
'B+/B' Asset Quality: The average credit quality of the indicative portfolio is 'B+/B', which is comparable to recent CLOs. Issuers rated in the 'B' rating category denote a highly speculative credit quality; however, in Fitch Ratings' 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 60.9%.
Strong Recovery Expectations: The indicative portfolio consists of 96.0% first-lien loans. Approximately 87.6% of the indicative portfolio has strong recovery prospects or a Fitch-assigned recovery rating of 'RR2' or higher, and the base case recovery assumption is 76.5%. In determining the class A note rating, 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 scenarios, resulting in a 36.5% 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 'Asf' 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 RW&Es appendix is not required for this transaction.