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Fitch to Rate Neuberger Berman CLO XVI-S, Ltd.; Publishes Presale Report

· 03/17/2021 16:21
Fitch to Rate Neuberger Berman CLO XVI-S, Ltd.; Publishes Presale Report

(The following statement was released by the rating agency)

Fitch Ratings-Chicago-17 March 2021:

Fitch Ratings has assigned expected ratings and Rating Outlooks to Neuberger Berman CLO XVI-S, Ltd.



Neuberger Berman CLO XVI-S Ltd.
----AR ; Long Term Rating; Expected Rating; AAA(EXP)sf; Rating Outlook Stable
----BR ; Long Term Rating; Expected Rating; NR(EXP)sf
----CR ; Long Term Rating; Expected Rating; NR(EXP)sf
----DR ; Long Term Rating; Expected Rating; NR(EXP)sf
----ER ; Long Term Rating; Expected Rating; NR(EXP)sf
----FR ; Long Term Rating; Expected Rating; NR(EXP)sf
----Subordinated Notes ; Long Term Rating; Expected Rating; NR(EXP)sf
----XR ; Long Term Rating; Expected Rating; NR(EXP)sf

Transaction Summary

Neuberger Berman CLO XVI-S, Ltd. (the issuer) is an arbitrage cash flow collateralized loan obligation (CLO) managed by Neuberger Berman Loan Advisers LLC that originally closed in January of 2018. The CLO's secured notes will be refinanced on March 30, 2021 (the refinancing date) from the proceeds of new secured and subordinated notes. The notes will provide financing on a portfolio of approximately $450.0 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-R notes benefit from credit enhancement of 38.0% and standard U.S. CLO structural features.

Asset Security (Positive): The indicative portfolio consists of 99.2% first-lien senior secured loans and has a weighted average recovery assumption of 74.20%. 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 39.0% of the portfolio balance in aggregate while the top five obligors can represent up to 12.5% 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 the agency's stress scenarios, Class A-R notes can withstand default rates of up to 58.7%, assuming a portfolio recovery rate of 36.0% in Fitch's 'AAAsf' scenario.

Fitch is comfortable with this level of marginal failure because of the unique circumstances of this transaction. It is currently out of its reinvestment period, limiting the manager's ability to reposition the portfolio prior to this reset. Fitch expecst some portfolio characteristics that affected these modeling results to improve after reset.

After reset, the manager will have the flexibility to improve these characteristics.

For example, the weighted average life of the indicative portfolio at 3.7 years, shorter than typical resets and new issues. This results in a low WAS of 3.22% compared with other CLOs from this manger.


RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Upgrade scenarios are not applicable to the class A-R 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 are between 'BB+sf' and 'AAAsf' for class A-R 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-R notes can withstand default rates above their respective portfolio credit model (PCM) 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.


DATA ADEQUACY

The sources of information used to assess these ratings were provided by the arranger (BofA Securities, 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 is available by clicking the link to the Appendix. Offering documents for this market sector do not typically include RW&Es that are available to investors and that relate to the asset pool underlying the security. However, the offering document for this transaction included a draft of the indenture as an appendix, which contains RW&Es related to the underlying asset pool. For further information, please see Fitch's Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions'.
Contacts:
Primary Rating Analyst
Matt Hunter, CFA
Director
+1 312 368 5432
Fitch Ratings, Inc.
One North Wacker Drive
Chicago, IL 60606

Secondary Rating Analyst
Colton Weiss,
Associate Director
+1 646 582 3425

Committee Chairperson
Aaron Hughes,
Senior Director
+1 312 368 2074

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@thefitchgroup.com

Additional information is available on www.fitchratings.com
Applicable Model
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)

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Additional Disclosures For Unsolicited Credit Ratings
Endorsement Status
Endorsement Policy

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