Fitch Expects to Rate NewStar Commercial Loan Funding 2016-1 LLC; Issues Presale
--\\$176,500,000 class A-1 notes 'AAA(EXP)sf', Outlook Stable;
--\\$20,000,000 class A-2 notes 'AAA(EXP)sf', Outlook Stable.
Fitch does not expect to rate the class B, C, D, or E notes or the membership interests.
NewStar Commercial Loan Funding 2016-1 LLC (the issuer) is a middle-market (MM) collateralized loan obligation (CLO) that will be managed by NewStar Financial, Inc. (NewStar). Net proceeds from the issuance of the secured notes and membership interests will be used to purchase a portfolio of \\$350 million of MM loans. The CLO will have an approximately four-year reinvestment period and two-year noncall period.
KEY RATING DRIVERS
Sufficient Credit Enhancement: Credit enhancement (CE) of 43.9% for class A-1 and class A-2 notes (collectively, class A notes), in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in a 'AAAsf' stress scenario. CE is significantly higher than the levels typically seen on broadly syndicated CLOs and in line with levels seen on recent Fitch-rated MM CLOs.
'B/B-' Asset Quality: Fitch expects the credit quality of the underlying obligors to primarily fall in the 'B/B-' range. Fitch's base case analysis centered on a portfolio with a weighted average rating factor (WARF) of 43, in accordance with the initial expected matrix point. The analysis indicated the class A notes demonstrate cash flow performance in line with other 'AAAsf' CLO notes. In the base case analysis, class A notes are projected to withstand default rates of up to 76.6%.
Strong Recovery Expectations: The transaction requires a minimum of 90% of the portfolio to consist of senior secured loans, cash and eligible investments, while portfolio management is governed in part by a Fitch weighted average recovery rate (WARR) test. In its base case analysis of the class A notes, Fitch adjusted the WARR of the portfolio to reach the base case minimum trigger of 71.5%, and further reduced recovery assumptions for higher rating stress scenarios. The base case analysis of class A notes assumed a 37.2% 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-1 and class A-2 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-1 and class A-2 notes.
Key Rating Drivers and Rating Sensitivities are further described in the accompanying presale report, which is available to investor's on Fitch's website at 'fitchratings.com'.
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.