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CLO pre sale

Transcript of Avery II CLO

  • Structured Finance

    www.fitchratings.com June 7, 2013

    Structured Credit / U.S.A.

    Avery Point II CLO, Limited/Corp.

    Presale Report

    Transaction Summary

    Avery Point II CLO, Limited and Avery Point II CLO, Corp. (together, Avery Point II, or the issuer) is

    an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by Sankaty

    Advisors, LLC (Sankaty). Net proceeds from the issuance of the secured and subordinated notes

    will be used to purchase a portfolio of approximately $500.0 million of primarily leveraged loans. The

    CLO will have a four-year reinvestment period, expected to end in July 2017.

    Key Rating Drivers

    Sufficient Credit Enhancement: Credit enhancement (CE) of 39.2% for 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 level of CE for class A notes is above the average

    CE of recent CLOs.

    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 category denote a highly speculative credit

    quality; however, class A notes are unlikely to be affected by the foreseeable level of defaults. Class

    A notes are robust against default rates of up to 67.8%.

    Strong Recovery Expectations: The indicative portfolio consists of 95.8% senior secured loans,

    approximately 91.5% of which have strong recovery prospects or a Fitch Ratings-assigned

    recovery rating of RR2 or higher. This is in line with the seniority profile of recent vintage CLOs.

    Inside This Report Page Transaction Summary 1 Key Rating Drivers 1 Additional Rating Drivers 2 Transaction Comparison 2 Asset Analysis 2 Cash Flow Analysis 4 Rating Sensitivity 7 Portfolio Management 9 Additional Structural Features 9 Counterparty Risk 11 Transaction and Legal Structure 12 Criteria Application, Model, and Data Adequacy 12 Performance Analytics 13

    Appendices 1418

    Related Presale Appendix

    Avery Point II CLO Limited/Corp. (June 2013)

    Related Criteria

    Global Structured Finance Rating Criteria (May 2013)

    Global Rating Criteria for Corporate CDOs (August 2012)

    Global Criteria for Cash Flow Analysis in CDOs (September 2012)

    Criteria for Interest Rate Stresses in Structured Finance Transactions (January 2013)

    Counterparty Criteria for Structured Finance and Covered Bonds (May 2013)

    Analysts Erika Tsang, CFA +1 212 908-0817 [email protected]

    Robert Rhein +1 312 606-2314 [email protected]

    Derek Miller +1 312 368-2076 [email protected]

    Capital Structure

    Class Expected Rating

    Expected Outlook

    Amount ($ Mil.) CE (%)


    Interest Rate (%) Final Maturity TT (%) TTLM (x)

    A AAAsf Stable 304.00 39.2 3mL + 1.11 July 2025 58.8 4.9

    B-1 NR N.A. 46.00 25.0 3mL + 1.55 July 2025 N.A. N.A.

    B-2 NR N.A. 25.00 25.0 3.21 July 2025 N.A. N.A.

    C NR N.A. 36.00 17.8 3mL + 2.75 July 2025 N.A. N.A.

    D NR N.A. 26.00 12.6 3mL + 3.45 July 2025 N.A. N.A.

    E NR N.A. 24.00 7.8 3mL + 4.25 July 2025 N.A. N.A.

    F NR N.A. 13.50 5.1 3mL + 5.10 July 2025 N.A. N.A. Subordinated

    Notes NR N.A. 42.25 N.A. Residual July 2025 N.A. N.A.

    Total 516.75

    aCredit enhancement (CE) is based on the target par amount of $500.0 million. Notes: Expected ratings do not reflect final ratings and are based on information provided by the issuer as of June 7, 2013. These expected ratings are contingent on final documents conforming to information already received. Ratings are not a recommendation to buy, sell, or hold any security. The offering circular and other material should be reviewed prior to any purchase. TT

    Tranche thickness. TTLM Tranche thickness loss multiple. NR Not rated. N.A. Not applicable.

  • Structured Finance

    Avery Point II CLO, Limited/Corp. 2

    June 7, 2013

    Additional Rating Drivers

    Consistent Portfolio Parameters

    The portfolio will be actively managed and bound by concentration limitations and collateral

    quality tests addressing various loan and structural characteristics. Aside from the lack of

    limitation on assets that pay less frequently than quarterly, the concentration limitations and

    collateral quality test levels presented to date are within the range of limits set in the majority of

    recent CLOs. Fitch addressed the impact of the most prominent risk-presenting concentration

    allowances and targeted test levels in its analysis.

    Asset Analysis

    The Fitch Portfolio Credit Model (PCM v2.3.2) was used to determine hurdle default rates

    (rating default rates, or RDRs) and expected portfolio recovery rates (rating recovery rates, or

    RRRs) for the AAAsf rating level. The PCM was run on the indicative portfolio, as well as a

    Fitch stressed portfolio that was created according to the portfolio concentration limits and

    collateral quality tests, as described below. Fitchs analysis focused on the Fitch stressed

    portfolio, given the managers ability to reinvest principal proceeds.

    The portfolio presented to Fitch on May 30, 2013 (the indicative portfolio) consists of 126

    assets from 120 obligors, including 64 unidentified obligors with assumed loan characteristics

    Related Research

    Sankaty Advisors, LLC (October 2012)

    U.S. Leveraged Finance Market Quarterly (First- Quarter Synopsis) (April 2013)

    U.S. Leveraged Finance: Road to Recovery Ratings (February 2012)

    CLO Market Quarterly (January 2013)

    The structure and portfolio

    composition of Avery Point II closely

    resembles that of recently issued

    CLOs, while the class A notes benefit

    from a relatively higher degree of CE

    than the average of recently rated


    Transaction Comparison 1Q132Q13 CLOs


    Transaction Avery Point II

    CLO Race Point

    VIII CLO Average Minimum Maximum

    Target Par Amount ($ Mil.) 500.0 500.0 488.4 300.0 898.7

    Reinvestment Period (Years) 4 4 4 2 4

    Noncall Period (Years) 2 2 2 2 3

    Notes CE

    Senior Class (%) 39.2 38.0 36.9 33.3 42.4


    Senior Overcollateralization (OC) Test A/B A/B A/B A/B A/B

    Senior OC Test Level (%) 124.3 125.9 124.3 118.4 142.0

    Portfolio Covenants and Concentration Limitations

    Max. Initial WAL (Years) 8.0 8.0 7.9 6.9 8.5

    Initial Target WARF 2800 2553 2725 2400 3150

    Max. CCC Assets (%) 5.0 7.5 7.1 5.0 7.5

    Min. WAS (%) 3.9 3.7 3.9 2.9 4.7

    Actual WAS (%) 4.6 4.5 4.8 4.0 5.9

    Max. Fixed Assets (%) 10.0 10.0 6.2 - 10.0

    Min. WAC (%) 7.3 8.0 6.9 4.0 8.0

    Max. Single Obligor (%) 2.5 2.5 2.5 2.0 3.0

    Min. Senior Secured (%) 90.0 90.0 91.1 90.0 95.0

    Max. 2nd Lien and Subordinate (%) 10.0 10.0 8.8 2.5 10.0

    Max. Covenant-Lite (%) 40.0 50.0 50.4 35.0 70.0

    Maximum Long-Dated Assets (%) 0.0 0.0 0.2 0.0 2.0

    aIncludes CLOs backed by portfolios of broadly syndicated loans that priced from Jan. 1, 2013 through May 31, 2013.

  • Structured Finance

    Avery Point II CLO, Limited/Corp. 3

    June 7, 2013

    comprising 38.7% of the portfolio. Fitch considers the indicative portfolio to be of similar

    diversity in terms of obligor and industry concentrations, relative to recently issued CLOs.

    Asset Quality

    The weighted average rating of the indicative portfolio is B/B (as determined by Fitchs global

    rating criteria for corporate CDOs). Fitch has an explicit rating or a credit opinion for 21 obligors from

    the indicative portfolio comprising 23.3% of the total portfolio par balance; ratings for 37.9% of the

    total portfolio were derived using Fitchs issuer default rating (IDR) equivalency map. In addition,

    unidentified obligors were predominantly indicated to be within the B rating category; these obligors

    were generally assumed to maintain these ratings in the Fitch stressed portfolio. As the transaction

    documents do not contain a covenant for a maximum Fitch weighted average rating factor (WARF),

    Fitch assumed the average portfolio quality remains in the B/B rating category in its construction

    of the Fitch stressed portfolio (see the portfolio distribution in the Underlying Rating Distribution chart


    Fitch considers 4.8% of the indicative portfolio to be rated in the CCC category, while the

    maximum permitted exposure to assets rated CCC (as defined by S&P) is 5.0%. Of this

    amount, 1.6% of the indicative portfolio has no public rating or Fitch credit opinion and was

    considered CCC. Fitch increased the CCC concentration for the Fitch stressed portfolio to

    match the maximum permitted CCC exposure.

    Asset Security

    The indicative portfolio consists of 95.8% senior secured loans, 2.2% second lien loans, and 2%

    bonds. Fitch has assigned asset-specific r