Fitch to Rate Regatta XVIII Funding Ltd.; Publishes Presale
Fitch to Rate Regatta XVIII Funding Ltd.; Publishes Presale
(The following statement was released by the rating agency)Fitch Ratings-Chicago-17 March 2021:
Fitch has assigned expected ratings and a Rating Outlook to Regatta XVIII Funding Ltd.
Regatta XVIII Funding Ltd.
----A-1 ; Long Term Rating; Expected Rating; AAA(EXP)sf; Rating Outlook Stable
----A-2 ; Long Term Rating; Expected Rating; NR(EXP)sf
----B ; Long Term Rating; Expected Rating; NR(EXP)sf
----C ; Long Term Rating; Expected Rating; NR(EXP)sf
----D ; Long Term Rating; Expected Rating; NR(EXP)sf
----E ; Long Term Rating; Expected Rating; NR(EXP)sf
----Subordinated ; Long Term Rating; Expected Rating; NR(EXP)sf
Regatta XVIII Funding Ltd. (the issuer) is an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by Napier Park Global Capital (US) LP. Net proceeds from the issuance of the secured and subordinated notes will provide financing on a portfolio of approximately $550 million of primarily first lien senior secured leveraged loans.
KEY RATING DRIVERS
Asset Credit Quality (Negative): The average credit quality of the indicative portfolio is 'B'/'B-', which is in line with that of recent CLOs. Issuers rated in the 'B' rating category denote a highly speculative credit quality; however, the class A-1 notes benefit from credit enhancement of 39.0% and standard U.S. CLO structural features.
Asset Security (Positive): The indicative portfolio consists of 99.7% first-lien senior secured loans and has a weighted average recovery assumption of 75.0%. Fitch stressed the indicative portfolio by assuming a higher portfolio concentration of assets with lower recovery prospects and further reduced recovery assumptions for higher rating stresses.
Portfolio Composition (Positive): The largest three industries may comprise up to 40.0% of the portfolio balance in aggregate, while the top five obligors can represent up to 11.5% of the portfolio balance in aggregate. The level of diversity required by industry, obligor and geographic concentrations is in line with other recent U.S. CLOs.
Portfolio Management (Neutral): The transaction has a 5.0-year reinvestment period and reinvestment criteria similar to other U.S. CLOs. Fitch's analysis was based on a stressed portfolio created by making adjustments to the indicative portfolio to reflect permissible concentration limits and collateral quality test levels.
Cash Flow Analysis (Positive): Fitch used a customized proprietary cash flow model to replicate the principal and interest waterfalls and assess the effectiveness of various structural features of the transaction. In Fitch's stress scenarios, class A-1 notes can withstand default rates of up to 61.0%, assuming recoveries of 36.6% in Fitch's 'AAAsf' scenario.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Upgrade scenarios are not applicable to the class A-1 notes, as these notes are in the highest rating category of 'AAAsf'.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Variability in key model assumptions, such as decreases in recovery rates and increases in default rates, could result in a downgrade. Fitch evaluated the notes' sensitivity to potential changes in such a metric. The results under these sensitivity scenarios ranged between 'BB+sf' and 'AAAsf' for class A-1 notes.
Additional Near-Term Stress Scenario
As outlined in "Fitch Ratings Expects to Revise Significant Share of CLO Outlooks to Stable," dated Jan. 22, 2021, Fitch also applied a near-term stress scenario to the portfolio that envisages negative credit migration driven by half of the assets with a Negative Rating Outlook; this scenario was not used to derive Fitch's rating action. Under this stress, the class A-1 notes can withstand default rates above their respective Portfolio Credit Model hurdle rates.
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.
The sources of information used to assess these ratings were provided by the arranger (Nomura Securities International, Inc.) and the public domain.
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.
REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool was not prepared for this transaction. Offering Documents for this market sector typically do not include RW&Es that are available to investors and that relate to the asset pool underlying the trust. Therefore, Fitch credit reports for this market sector will not typically include descriptions of RW&Es. For further information, please see Fitch's Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions'.
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Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
CLO / CDO of ABS Cash Flow Model, v23.17.1 (1)
CLO – Fitch Stressed Portfolio Model, v2.1.0 (1)
Portfolio Credit Model, v2.12.0 (1)
Dodd-Frank Rating Information Disclosure Form
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