Fitch Upgrades 1 & Affirms 3 Classes of Suffield CLO, Ltd./Corp.
Fitch Ratings has upgraded one class and affirmed three classes of notes issued by Suffield CLO, Ltd./Corp. (Suffield CLO) as follows:
--$11,658,265 class IV notes upgraded to 'BBBsf' from 'Bsf'; Outlook Stable;
--$5,607,983 class V-A notes affirmed at 'Csf'; RE 5%;
--$14,019,957 class V-B notes affirmed at 'Csf'; RE 5%;
--$14,700,000 (original stated balance) class L combination securities affirmed at 'Csf'.
The upgrade of the class IV notes reflects the stable portfolio performance and the increasing credit enhancement available to these notes via continued amortization of the underlying collateral. The Rating Outlook is Stable, reflecting Fitch's expectation of stable performance over the next one to two years.
Since Fitch's last rating action in January 2012, the class III-A and class III-B notes, which then had a combined balance of approximately $20.9 million, have been paid in full. The class IV notes are now the senior-most remaining class and have received principal payments totaling approximately $23.3 million, or about 67% of their initial balance. These notes are supported by performing portfolio of roughly $21.9 million, in addition to $1.6 million of available principal proceeds, as of the Oct. 19, 2012 trustee report.
While the class IV notes now benefit from improved par coverage levels due to the collateral and capital structure amortization, these notes are also exposed to remaining risks in the portfolio. In particular, the remaining portfolio consists of loans from just 18 unique obligors generally rated in the 'B' and 'CCC' rating categories. Additionally, over 45% of the performing loans are scheduled to mature after the stated maturity date of the transaction in September 2014, introducing a dimension of market value risk to the transaction if the loans have not been amortized or sold by that time. Fitch incorporated stresses on the assumed liquidation values of the long-dated loans in its cash flow model analysis.
Fitch's cash flow modeling results indicated passing ratings higher than 'BBBsf' for the class IV notes; however, the extent of the upgrade accounts for the improved position of the class IV notes since Fitch's last rating action while acknowledging the remaining portfolio risks described above. Additionally, the degree of obligor concentration in the portfolio led Fitch to consider its rating cap criteria, which generally calls for a rating cap for a class of notes that Fitch deems to be reliant on the performance of a concentrated portfolio. Given these considerations, a rating of 'BBBsf' was assigned reflecting the view that capacity for payment of financial commitments is adequate but adverse business or economic conditions are more likely to impair this capacity.
The class V-A and V-B (collectively, class V) notes are undercollateralized, as demonstrated by a reported class V overcollateralization (OC) ratio of 71.1%. These notes continue to partially defer their scheduled interest payments; at the Sept. 19, 2012 payment date the notes received a total of $148 thousand in interest payments, compared to their scheduled combined interest payment of $775 thousand. Fitch expects these notes to experience a principal loss at maturity and has therefore affirmed the 'Csf' ratings. Their recovery estimates (REs) indicated above reflect Fitch's expectation of minimal future principal payments being received by these notes in a base-case scenario.
The rating of the class L combination securities addresses the likelihood that investors will receive the stated balance of principal by the final maturity date, as well as a yield of 8.4% on the original investment. The class L combination notes received approximately 4.8% of distributions to the class III-A notes (which are now paid-in-full), 28.6% of distributions to the class IV notes, and 7.4% of distributions to the preferred shares (which are not expected to receive any future distributions). The floating-rate class III-A and class IV notes have historically received coupons significantly lower than the required 8.4% yield on the class L combination securities, which has been exacerbated by the low interest rate environment. As a result, the class L combination securities are not expected to be able to achieve this yield, and are affirmed at 'Csf'.
In order to account for the portfolio's concentration risk, Fitch modeled the transaction using the Obligor Concentration Uplift (OCU) feature in its Portfolio Credit Model (PCM) as the base case scenario. The default and recovery level outputs from PCM were then utilized in Fitch's cash flow model under various default timing and interest rate stress scenarios, as described in the report 'Global Criteria for Cash Flow Analysis in CDOs'. While Fitch's cash flow analysis indicated higher passing rating levels for the class IV notes, the extent of the upgrade captures the improvement in credit enhancement while accounting for other risks in the remaining portfolio, as described above.
Suffield CLO is a cash flow collateralized loan obligation (CLO) that closed on Sept. 13, 2000 and is managed by Babson Capital Management LLC. Suffield CLO exited its reinvestment period in September 2005 and currently has a portfolio primarily consisting of senior secured loans. The CLO is scheduled to mature on September 26, 2014.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
The information used to assess these ratings was sourced from the asset manager, periodic trustee reports, note valuation reports, and the public domain.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (June 6, 2012);
--'Global Rating Criteria for Corporate CDOs' (Aug. 8, 2012);
--'Global Criteria for Cash Flow Analysis in CDOs' (Sept. 13, 2012);
--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (March 20, 2012);
--'Counterparty Criteria for Structured Finance Transactions' (May 30, 2012);
--'Criteria for Rating Caps in Global Structured Finance Transactions' (Aug. 2, 2012).
Applicable Criteria and Related Research:
Criteria for Rating Caps in Global Structured Finance Transactions
Counterparty Criteria for Structured Finance Transactions
Criteria for Interest Rate Stresses in Structured Finance Transactions
Global Structured Finance Rating Criteria
Global Criteria for Cash Flow Analysis in CDOs
Robert Rhein, +1 312-606-2314
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Sandro Scenga, +1 212-908-0278