Fitch Assigns Arbour CLO III Limited Final Ratings
OREANDA-NEWS. Fitch Ratings has assigned Arbour CLO III Limited notes final ratings, as follows:
Class A-1: 'AAAsf'; Outlook Stable
Class A-2: 'AAAsf'; Outlook Stable
Class B-1: 'AAsf'; Outlook Stable
Class B-2: 'AAsf'; Outlook Stable
Class C: 'Asf'; Outlook Stable
Class D: 'BBBsf'; Outlook Stable
Class E: 'BBsf'; Outlook Stable
Class F: 'B-sf'; Outlook Stable
Subordinated notes: not rated
Arbour CLO III Limited is an arbitrage cash flow collateralised loan obligation (CLO). Net proceeds from the issuance of the notes will be used to purchase a EUR400m portfolio of European leveraged loans and bonds. The portfolio is managed by Oaktree Capital Management (UK) LLP. The transaction features a four-year reinvestment period.
KEY RATING DRIVERS
'B'/'B+' Portfolio Credit Quality
Fitch places the average credit quality of obligors in the 'B'/'B+' range. The agency has public ratings or credit opinions on all but two of the obligors in the identified portfolio. The weighted average rating factor of the identified portfolio is 30.6.
High Recovery Expectations
At least 90% of the portfolio comprises senior secured obligations. Fitch has assigned Recovery Ratings to all but two assets in the identified portfolio. The covenanted minimum Fitch weighted average recovery rate (WARR) for assigning the final ratings is 69.5%. The WARR of the indicative portfolio is 75.4%.
The transaction contains a covenant that limits the top 10 obligors to either 21% or 23% of the portfolio balance depending on the matrix point selected by the investment manager. In addition portfolio profile tests limit exposure to the top Fitch industry to 20% and the top three Fitch industries to 40%. This ensures that the asset portfolio is not exposed to excessive obligor concentration.
Partial Interest Rate Hedge
Between 5% and 15% of the portfolio may be invested in fixed rate assets, while fixed rate liabilities account for 8.75% of the target par amount. The collateral manager will not be able to buy floating rate assets while the test is below 5%.
Limited FX Risk
The transaction is allowed to invest in non-euro-denominated assets, provided these are hedged with perfect asset swaps within six months of purchase. Unhedged non-euro assets may not exceed 2.5% of the portfolio at any time and can only be included if at the trade date of such assets the portfolio balance is above the target par amount when their principal balance converted into euro at spot rate are subject to a haircut of 50%.
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 the structure considers the confirmation to be given if Fitch declines to comment.
A 25% increase in the expected 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 four notches for the rated notes.
DUE DILIGENCE USAGE
All but two 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.
REPRESENTATIONS AND WARRANTIES
A description of the transaction's Representations, Warranties and Enforcement Mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool was not prepared for this transaction. Offering documents for EMEA leveraged finance CLOs typically do not include RW&Es that are available to investors and that relate to the asset pool underlying the CLO. Therefore, Fitch credit reports for EMEA leveraged finance CLO offerings will not typically include descriptions of RW&Es. For further information, please see Fitch's Special Report titled "Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions," dated 21 January 2016.
Key Rating Drivers and Rating Sensitivities are further described in the accompanying new issue report, which will shortly be available at www.fitchratings.com.
SOURCES OF INFORMATION
The information below was used in the analysis.
- Loan-by-loan data provided by the arranger as at 4 February 2015
- Offering circular provided by the arranger as at 10 February 2016
- Transaction documents provided by the arranger as at 10 February 2016