Fitch Ratings expects to assign the following rating and Rating Outlook to Apidos CLO XX:
--$320,000,000 class A-1 notes 'AAAsf'; Outlook Stable.
Fitch does not expect to rate the class A-2, B, C, D, or E notes or the subordinated notes.
The assignment of the expected ratings is contingent on the receipt of final documents conforming to information already reviewed.
TRANSACTION SUMMARY
Apidos CLO XX (issuer) and Apidos CLO XX LLC (co-issuer) together comprise an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by CVC Credit Partners, LLC (CVC). Fitch's Funds and Asset Manager Ratings team has evaluated CVC and determined its capabilities to be acceptable for purposes of managing this transaction. Net proceeds from the issuance of the secured and subordinated notes will be used to purchase a portfolio of approximately $500 million of primarily senior secured leveraged loans. The CLO will have a four-year reinvestment period and an approximately two-year noncall period.
RATING RATIONALE
Fitch's analysis focuses primarily on a Fitch-stressed portfolio, which accounts for many of the worst-case portfolio concentrations permitted by the indenture. Cash flow modeling of the Fitch-stressed portfolio indicates performance in-line with the assigned ratings for the class A-1 notes in Fitch's standard cash flow scenarios.
KEY RATING DRIVERS
Sufficient Credit Enhancement: Credit enhancement (CE) of 36% for class A-1 notes, in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in the 'AAAsf' stress scenario. The degree of CE available to the class A-1 notes is lower than the average CE of recent CLO issuances; however, cash flow modeling indicates performance in line with other 'AAAsf' CLO notes.
'B+/B' Asset Quality: The average credit quality of the intended ramped portfolio (the indicative portfolio) is 'B+/B', which is comparable to recent CLOs. Issuers rated in the 'B' rating category denote highly speculative credit quality; however, in Fitch's opinion, class A-1 notes are unlikely to be affected by the foreseeable level of defaults. Class A-1 notes are projected to be able to withstand default rates of up to 56.9%.
Strong Recovery Expectations: The indicative portfolio consists of 96.3% first-lien senior secured loans. Approximately 89.2% of the indicative portfolio has either strong recovery prospects or a Fitch-assigned Recovery Rating of 'RR2' or higher, resulting in a base case recovery assumption of 75.9%. In determining the class A-1 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 assumptions. The analysis of the class A-1 notes assumed a 35.8% recovery rate in Fitch's 'AAAsf' scenario.
FITCH ANALYSIS
The Fitch-stressed portfolio was assumed to consist of $500 million par amount of loans, 90% of which represented senior secured loans and 10% second-lien loans. Notable portfolio concentrations specified by the transaction documents include:
--Minimum 90% senior secured loans and principal cash;
--Maximum 10% second-lien loans and unsecured loans;
--Maximum 2.5% concentration for the top five obligors; no others greater than 2%, subject to a maximum 1% for non-senior secured loans issued by a single obligor;
--Maximum 7.5% assets rated 'Caa1' and below (by Moody's);
--Maximum 5.0% fixed-rate assets;
--Maximum 60% cov-lite loans;
--Maximum industry concentrations: 15% for one industry, 12% for the next three largest industries, and no others greater than 10%.
Maximum obligor concentrations were assumed for the top five senior secured loans. Fitch also maximized the permitted industry concentrations for the three largest industries and assumed the maximum permitted portfolio weighted average life of eight years when creating the Fitch-stressed portfolio.
Fitch considers 2.4% of the indicative portfolio to be rated in the 'CCC' category, according to Fitch's Issuer Default Rating (IDR) Equivalency Map. The transaction allows for a 7.5% concentration limitation of 'CCC' rated collateral (as defined by Moody's). The exposure to 'CCC' assets in the Fitch-stressed portfolio was subsequently increased to reach the 7.5% concentration limitation.
The Fitch-stressed portfolio is also composed of 95% floating-rate assets and 5% fixed assets. Although the arranger indicated the expected initial minimum weighted average spread (WAS) of the portfolio will be 3.85%, Fitch assumed that all floating-rate assets earn 3.70% over LIBOR, in line with the WAS of the indicative portfolio without accounting for LIBOR floors. Fitch also assumed fixed-rate assets will earn 7%, as represented by the arranger as the minimum weighted average coupon of the portfolio.
Projected default and recovery statistics of the Fitch-stressed portfolio were generated using Fitch's portfolio credit model (PCM). The PCM default rate and recovery rate outputs were 59% and 35.8%, respectively, at the 'AAAsf' rating level. The PCM outputs were used as inputs into Fitch's proprietary cash flow model, which was customized to reflect the issuer's specific transaction structure.
Fitch's cash flow modeling considered 12 stress scenarios to account for different combinations of four default timings and three interest rate stresses. Fitch assumed that the class A-1 notes earned a spread of 1.55% over three-month LIBOR, based on pricing information provided by the arranger. The class A-1 notes passed the 'AAAsf' PCM hurdle rate in 10 of the 12 stress scenarios when analyzing the Fitch-stressed portfolio, with two marginal failures of 0.3% and 2.1% below the threshold. Fitch was comfortable assigning an expected 'AAAsf' rating to the class A-1 notes because the agency believes the notes can sustain a robust level of defaults, combined with low recoveries, as well as other factors such as the strong performance of the notes in the sensitivity scenarios, the degree of cushion when analyzing the indicative portfolio, and CVC's strong track record as a CLO asset manager.
Fitch also analyzed the indicative portfolio, which included 207 loans from 190 obligors accounting for 85% of the target portfolio amount, and 30 unidentified assets with assumed characteristics constituting the remaining 15% of the indicative portfolio. The 'AAAsf' PCM default rate and recovery rate outputs of the indicative portfolio were 47.3% and 39.1%, respectively, with a minimum breakeven cushion of 12.8% above the PCM default hurdle in the cash flow analysis.
RATING SENSITIVITIES
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 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 notes. The results of the sensitivity analysis also contributed to Fitch's assignment of Stable Outlook to the class A-1 notes.
PERFORMANCE ANALYTICS
Fitch will monitor the transaction regularly and as warranted by events with a review. Events that may trigger a review include, but are not limited to, the following:
--Asset defaults;
--Portfolio migration;
--OC or IC test breach;
--Breach of concentration limitations or portfolio quality covenants;
--Future changes to Fitch's rating criteria.
Surveillance analysis is conducted on the basis of the then-current portfolio. Fitch's goal is to ensure that the assigned ratings remain an appropriate reflection of the issued notes' credit risk.
An assessment of the transaction's representations and warranties was also completed and found to be consistent with the ratings assigned to the certificates. For further information, see 'Apidos CLO XX/LLC Representations and Warranties Appendix', dated Jan. 15, 2015.
Details of the transaction's performance are available to subscribers on Fitch's web site at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'.
The expected ratings are based on information provided to Fitch as of Jan. 14, 2015. Sources of information used to assess these ratings were provided by the arranger, Credit Suisse Securities (USA) LLC, and the public domain.
Applicable Criteria & Related Research:
--'Global Structured Finance Rating Criteria' (Aug. 4, 2014);
--'Global Rating Criteria for Corporate CDOs' (July 25, 2014);
--'Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds' (Dec. 19, 2014);
--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 14, 2014).
Applicable Criteria and Related Research: Apidos CLO XX/LLC
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=855388
Counterparty Criteria for Structured Finance and Covered Bonds
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158
Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=838868
Global Structured Finance Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=754389
Global Rating Criteria for Corporate CDOs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753057
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=971395
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