Fitch Ratings has upgraded Oak Hill European Credit Partners III DAC's class C notes and revised the Outlooks on the class D-R to F-R notes to Stable from Positive, as detailed below.

RATING ACTIONS

Entity / Debt

Rating

Prior

Oak Hill European Credit Partners III DAC

A-1-R XS1642509548

LT

AAAsf

Affirmed

AAAsf

A-2-R XS1642571423

LT

AAAsf

Affirmed

AAAsf

B-1-R XS1642511528

LT

AAAsf

Affirmed

AAAsf

B-2-R XS1642511791

LT

AAAsf

Affirmed

AAAsf

B-3-R XS1642512252

LT

AAAsf

Affirmed

AAAsf

C-R XS1642512682

LT

AA-sf

Upgrade

A+sf

D-R XS1642513656

LT

A+sf

Affirmed

A+sf

E-R XS1642514035

LT

BB+sf

Affirmed

BB+sf

F-R XS1642516592

LT

B+sf

Affirmed

B+sf

Page

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VIEW ADDITIONAL RATING DETAILS

Transaction Summary

Oak Hill European Credit Partners III DAC is a cash flow collateralised loan obligation (CLO). The underlying portfolio of assets mainly consists of leveraged loans and is managed by Oak Hill Advisors (Europe), LLP. The deal exited its reinvestment period in July 2021.

KEY RATING DRIVERS

Increased Credit Enhancement: The senior class A-1-R and A-2-R notes have repaid by EUR83.6 million and EUR5.9 million, respectively, since the last review in October 2021. As a result, credit enhancement has increased across the structure.

Reinvestment Unlikely: Following the exit of its reinvestment period in July 2021 any subsequent reinvestment of unscheduled principal proceeds and sale proceeds from credit-impaired and credit-improved obligations will be subject to Moody's weighted average rating factor (WARF) and Fitch 'CCC' test. These tests were failing as of 6 July 2022. 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 Stable Outlooks, including today's Outlook revision to the junior notes, reflect Fitch's expectation that deleveraging of the notes would be constrained in the next 12-18 months by the small portion of assets maturing by 2023 and limited prepayment prospects in the current uncertain macroeconomic environment.

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 1.4% below par and is failing Fitch's 'CCC' limit, weighted average life, weighted average spread, Fitch WARF and Moody's WARF as of 6 July 2022. The other tests and the coverage tests were reported as passing. Exposure to assets with FDRs of 'CCC+' and below is 8.6% as calculated by the trustee. The portfolio had an exposure to defaulted assets of EUR0.2 million as of 6 July and Fitch-calculated exposure to 'CC' and below rated obligors of EUR3.8 million as of 13 August 2022.

'B'/'B-' Portfolio: Fitch assesses the average credit quality of the obligors at 'B'/'B-'. Fitch calculated a WARF of 25.7 for the current portfolio and 27 for the stressed portfolio of obligors on Negative Outlook.

High Recovery Expectations: Senior secured obligations comprise 98.8% of the portfolio. Fitch views the recovery prospects for these assets as more favourable than for second-lien, unsecured and mezzanine assets. The Fitch-calculated weighted average recovery rating (WARR) of the current portfolio as reported by the trustee was 66.2%.

Diversified Portfolio Despite Amortisation: The portfolio has repaid EUR53.1 million since our last review in October 2021 but remains well-diversified across obligors, countries and industries. The top-10 obligor concentration is 19.5%, and no obligor represents more than 2.3% of the portfolio balance.

Deviation from Model-implied Rating: The class C-R notes' 'AA-sf' rating is two notches below their model-implied rating (MIR), reflecting the limited cushion on this class of notes for the Fitch-stressed portfolio of obligors on Negative Outlook.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A 25% increase of the mean default rate (RDR) across all ratings and a 25% decrease of the recovery rate (RRR) across all ratings of the current portfolio would have no impact on class A-1-R, A-2-R, B-1-R and B-2-R notes and would lead to downgrades of no more than three notches for the class C-R, 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. Due to the better WARF of the current portfolio than that of the Fitch-stressed portfolio of obligors on Negative Outlook and to the rating deviation from MIR, the class C-R notes have a rating cushion of two notches and the class E-R and F-R notes of one notch while other classes of notes have no rating cushion.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

A 25% reduction of the mean RDR across all ratings 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 three 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.

DATA ADEQUACY

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

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