Fitch Assigns Final Ratings to KVK CLO 2013-1 Ltd.
Fitch Ratings has assigned the following rating to the class A notes of KVK CLO 2013-1 Ltd. (KVK CLO 2013-1):
--$346,500,000 class A notes 'AAAsf'; Outlook Stable.
KEY RATING DRIVERS
Sufficient Credit Enhancement: Credit enhancement of 37.0% for the class A notes, in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in an 'AAAsf' stress scenario. The degree of credit enhancement available to the class A notes is slightly above the average for recent CLO issuances.
'B/B' Asset Quality: The average credit quality of the indicative portfolio is 'B/B', which is comparable to recent CLOs. Issuers rated in the 'B' rating category denote a relatively weak credit quality; however, in Fitch Ratings' opinion, the class A notes are unlikely to be affected by the foreseeable level of defaults. Class A notes are projected to be able to withstand default rates of up to 64.5%.
Strong Recovery Expectations: The indicative portfolio is comprised of 97.4% senior secured loans, of which approximately 90% have strong recovery prospects or a Fitch-assigned recovery rating of 'RR2' or higher.
Consistent Portfolio Parameters: The portfolio will be actively managed and bound by concentration limitations addressing various asset characteristics. The concentration limitations presented are generally within the range of limits set in the majority of recent CLOs. Fitch addressed the impact of the most prominent risk-presenting concentration allowances in its analysis.
KVK CLO 2013-1 is an arbitrage cash flow collateralized loan obligation (CLO). Net proceeds from the note issuance will be invested in an approximately $550 million portfolio of primarily senior secured leveraged loans. The latest portfolio provided to Fitch by the arranger, Goldman, Sachs & Co., on Feb. 20, 2013 represented that approximately 80% of the portfolio assets had been purchased with the remaining portion consisting of identified but not yet traded assets (9.6%) and unidentified assets with assumed characteristics (10.4%). Fitch's analysis was primarily based off of a Fitch stressed portfolio that incorporated adjustments to this indicative portfolio to account for various concentration limitations and collateral quality metrics permitted by the transaction documents.
KVK CLO 2013-1 has a four-year reinvestment period, scheduled to end in April 2017, as well as a two-year non-call period that will end in April 2015. During the reinvestment period discretionary sales are permitted up to 20% of the portfolio balance during any rolling 12-month period. Sales of defaulted, credit-risk and credit-improved securities are permitted at any time, including after the reinvestment period, with the sale of credit-improved assets subject to certain restrictions. The manager also has the ability to reinvest unscheduled principal proceeds and sales proceeds from the disposal of credit risk assets after the reinvestment period, subject to certain conditions.
The transaction features portfolio concentration limitations that are generally consistent with recent CLO issuance. The portfolio concentration limitations include a maximum 5% allowance for assets rated 'CCC+' or below (as defined by either S&P or Moody's) and a 10% total maximum exposure to assets that are not senior secured loans, such as bonds and second lien loans. The transaction's initial weighted average life covenant of approximately 8 years steps down with the passage of time. As with most other recent CLOs rated by Fitch the asset manager has the flexibility to select the required levels of various collateral quality tests, such as the minimum weighted average spread and weighted average recovery rate.
The class A notes have been assigned a Stable Outlook based on Fitch's expectation of steady performance through anticipated levels of default and the various forms of credit enhancement available to the notes.
The transaction will be managed by Kramer Van Kirk Credit Strategies LP (KVK). As part of its analysis, Fitch's Funds and Asset Manager Ratings Group (FAM) evaluated KVK and determined its capabilities satisfactory in the context of the ratings assigned to this transaction and the investment parameters that govern KVK's activities.
In addition to the analysis of the indicative and Fitch stressed portfolios, Fitch also analyzed the structure's sensitivity to the potential variability of key model assumptions. The rating sensitivity analyses were based on the Fitch stressed portfolio. Fitch ran its standard sensitivities as described in its 'Global Rating Criteria for Corporate CDOs', as well as additional sensitivity scenarios based on certain extreme points in the Moody's matrix toward which the portfolio will be managed in addition to a sensitivity to a lower portfolio weighted average spread. The class A notes displayed robust performance in Fitch's various sensitivity analyses, in line with other Fitch-rated 'AAAsf' notes. The sensitivity analysis will be described in more detail in the new issue report that will be available shortly at 'www.fitchratings.com'.
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 sources of information used to assess these ratings were the transaction documents and other materials provided by the arranger, Goldman, Sachs & Co., and the public domain.
Applicable Criteria & 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' (Jan. 25, 2013);
--'Counterparty Criteria for Structured Finance Transactions' (May 30, 2012).
Applicable Criteria and Related Research
Global Structured Finance Rating Criteria
Global Rating Criteria for Corporate CDOs
Global Criteria for Cash Flow Analysis in CDOs
Criteria for Interest Rate Stresses in Structured Finance Transactions
Counterparty Criteria for Structured Finance Transactions
Robert Rhein, +1-312-606-2314
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Aaron Hughes, +1-312-368-2074
Derek Miller, +1-312-368-2076
Sandro Scenga, +1-212-908-0278
New York, Media Relations