Avery II CLO
Embed Size (px)
Transcript of Avery II CLO
www.fitchratings.com June 7, 2013
Structured Credit / U.S.A.
Avery Point II CLO, Limited/Corp.
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
Related Presale Appendix
Avery Point II CLO Limited/Corp. (June 2013)
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]
Class Expected Rating
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.
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.
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.
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
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
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.
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.
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.
The indicative portfolio consists of 95.8% senior secured loans, 2.2% second lien loans, and 2%
bonds. Fitch has assigned asset-specific r