Fitch Ratings has upgraded Cairn CLO VI B.V.'s class D-R notes and revised the Outlooks on the class C-R, E-R and F-R notes to Stable from Positive, as detailed below.
Entity / Debt
Cairn CLO VI B.V.
Class A-R XS1850309466
Class B-R XS1850309896
Class C-R XS1850310126
Class D-R XS1850310555
Class E-R XS1850310803
Class F-R XS1850310985
VIEW ADDITIONAL RATING DETAILS
The transaction is a cash-flow collateralised loan obligation backed by a portfolio of mainly European leveraged loans and bonds and is managed by Cairn Loan Investments LLP. The deal exited its reinvestment period in July 2020.
KEY RATING DRIVERS
Increased Credit Enhancement: The senior class A-R notes have repaid by EUR50.5 million since the last review in November 2021. As a result, credit enhancement has increased across the structure.
Resilient Asset Performance: The transaction's metrics indicate resilient asset performance, which together with increased credit enhancement, led to today's upgrade and affirmations. This is despite the transaction currently being 0.3% below par and failing Fitch's 'CCC' limit, weighted average life, weighted average spread, Fitch and Moody's weighted average rating factor (WARF) tests as of 13 July 2022. The transaction was reportedly passing its coverage tests.
Exposure to assets with FDRs of 'CCC+' and below is 10% as calculated by the trustee. The portfolio had an exposure to defaulted assets of EUR1.3 million as of 13 July and Fitch-calculated exposure to 'CC' and below rated obligors of EUR4.6 million as of 10 September 2022.
Reinvestment Unlikely: Following the exit of its reinvestment period, we do not expect any reinvestment of unscheduled principal proceeds and sale proceeds from credit-impaired and credit-improved obligations as the transaction as of 13 July 2022 was failing Moody's WARF and Fitch's 'CCC' test. Given the manager is unlikely to reinvest, Fitch has assessed the transaction by notching down one level all assets in the current portfolio with Fitch-derived ratings (FDR) on Negative Outlook.
Limited Deleveraging Prospect: The Outlook revision to Stable from Positive reflects Fitch's expectations of weaker asset performance in light of the current macroeconomic challenges.
'B'/'B-' Portfolio: Fitch assesses the average credit quality of the obligors at 'B'/'B-'. Fitch calculated a WARF of 27.4 for the current portfolio and 29.3 for the stressed portfolio of obligors on Negative Outlook.
High Recovery Expectations: Senior secured obligations comprise 100% of the portfolio. Fitch views the recovery prospects for these assets as more favourable than for second-lien, unsecured and mezzanine assets. Fitch calculated a weighted average recovery rating (WARR) of 62% for the current portfolio.
Portfolio Concentration: The portfolio has become more concentrated with amortisation of EUR48.3 million since our last review in November 2021. The top-10 obligor concentration is at 27% while the largest issuer represents 4% of the portfolio. The largest Fitch-defined industry as calculated by the agency represents 17.2% and the three-largest Fitch-defined industries at 38.5%, both within their respective limits of 17.5% and 40%.
Deviation from Model-implied Rating: The class C-R notes' 'A+sf' rating and the class D-R notes' 'Asf' rating are each one notch below their model-implied ratings (MIRs), reflecting the limited cushion on these classes of notes for the Fitch-stressed portfolio of obligors on Negative Outlook.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A 25% increase of the mean default rate (RDR) and a 25% decrease of the recovery rate (RRR) across all ratings of the current portfolio would have no impact on class A-R, B-R and C-R notes and would lead to downgrades of no more than four notches for the class D-R, E-R and F-R notes.
Downgrades, which are based on the current portfolio, may occur if the loss expectation is larger than initially assumed, due to unexpectedly high levels of defaults and portfolio deterioration.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A 25% reduction of the mean RDR and a 25% increase in the RRR across all ratings of the Fitch-stressed portfolio of obligors on Negative Outlook would lead to upgrades of up to four notches for the rated notes, except for the 'AAAsf' notes.
Upgrades, except for the 'AAAsf' notes, may occur on stable portfolio credit quality and deleveraging, leading to higher credit enhancement and excess spread available to cover losses in the remaining portfolio.
Best/Worst Case Rating Scenario
International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.
Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pool and the transaction. Fitch has not reviewed the results of any third party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring.
The majority of the underlying assets or risk-presenting entities 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 groups within Fitch and/or other rating agencies to assess the asset portfolio information or information on the risk-presenting entities.
Overall, and together with any assumptions referred to above, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Additional information is available on www.fitchratings.com
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure.