Fitch Assigns Cairn CLO III B.V. Final Ratings
EUR181.5m Class A: 'AAAsf'; Outlook Stable
EUR28m Class B: 'AAsf'; Outlook Stable
EUR20m Class C: 'Asf'; Outlook Stable
EUR16.5m Class D: 'BBBsf'; Outlook Stable
EUR22m Class E: 'BBsf'; Outlook Stable
EUR8m Class F: 'B-sf'; Outlook Stable
EUR30.1m subordinated notes: not rated
Cairn CLO III B.V. is a cash flow collateralised loan obligation (CLO).
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 the entire identified portfolio. The weighted-average rating factor of the initial portfolio is 33.5.
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 to all of the assets in the identified portfolio. The Fitch weighted average recovery rate of the initial portfolio is 69.8%.
Limited Interest Rate Risk
Unhedged fixed-rate assets cannot exceed 1% of the portfolio. Consequently, interest rate risk is naturally hedged for most of the portfolio through floating-rate liabilities.
Limited FX Risk
Any non-euro-denominated assets have to be hedged with perfect asset swaps as of the settlement date, limiting foreign exchange (FX) risk. The transaction is permitted to invest up to 30% of the portfolio in non-euro-denominated assets.
Cairn CLO III B.V. closed in 2013 and was restructured in October 2015. Following the restructuring, the transaction continues to hold a portfolio of European leveraged loans with a target par of EUR300m. The portfolio is managed by Cairn Loan Investments LLP. 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 two 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 transaction.
The majority of the underlying assets have ratings or credit opinions from Fitch and/or other Nationally Recognised Statistical Rating Organisations and/or European Securities and Markets Authority registered rating agencies. Fitch has relied on the practices of the relevant Fitch groups and/or other rating agencies 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 arranger as at 15 August 2015
- Final offering circular provided by the arranger as at 19 October 2015
- Executed transaction documents as at 20 October 2015
Key Rating Drivers and Rating Sensitivities are further described in the accompanying new issue report, which will shortly be available at www.fitchratings.com.